P. Derek Ten Broeck Jr.
TB Group LLC
When you look objectively at your business, is there a person whose sudden absence would require the company to go into bankruptcy? According to Investopedia, a key person insurance policy means the insurance payout “can be used to cover the costs of recruiting, hiring, and training a replacement for the deceased person. If the company doesn't believe it can continue operations, it can use the money to pay off debts, distribute money to investors, provide severance benefits to employees, and close the business down in an orderly manner.” So, even if the business folds, it can do so on its own terms and not those of a bankruptcy court.
Key Person Insurance
When someone whose death or incapacity would be devastating to the business, the company can take out a key person life insurance policy on the person. The company buys the insurance and pays the policy premiums, naming itself as beneficiary. The key person must give consent to this insurance.
You can see right away why the key person might need to seek professional help when the company takes out the policy. If the person is already a part owner of the business, for example, the insurance payout could have tax implications for their estate. In addition, the key person policy could restrict how much life insurance the key person can purchase on their own. On the other hand, there is an intangible, but no less real, benefit in seeing their value to the business confirmed.
If you want continuity for your business, or at least its orderly dissolution, you must consider key person insurance.
Unrecognized Key People — an Organizational Minefield
There is another wrinkle in the key person concept that’s worth thinking about. Here’s a question I found on the famous questions website, Quora: “Have you ever seen an employer fire someone without realizing what a crucial role the employee played?” Well over 100 people, most of them sacked crucial employees, provided personal stories in answer to that question.
In one story, firing the head of a software development team meant the company could not ship its two new products to its largest customers. In another, the woman who operated the company payroll system wasn’t there for the next payroll, and the company had to hire her back at four times her previous salary. In yet another story, a manufacturing company laid off a janitor who had been replacing the batteries in a cooling unit every two weeks. Two weeks after the janitor left, the company’s electric hardening furnace overheated and had a melt down because no one had replaced the batteries in the cooling unit.
This tells me not simply that there are an alarming number of boneheaded managers out there. But there are a lot of unrecognized key persons, too. These may not be the kind of people the company will insure with a key person policy. But they are the kind of people whose sudden absence can throw the company into crisis.
Managing as Well as Insuring Key People
It’s impossible to know every single detail of how your business runs. That is, after all, the point of hiring people! But if you don’t recognize your key people, you run the risk your managers might abuse them or thoughtlessly lay them off. The only reliable protection your company has is to make sure every employee in the company is managed like a key person, whether or not they are the subject of key person insurance. And don’t fire anybody for a reason that is less expensive than their actual value to the company. You may end up rehiring them at four times their regular salary. You may end up losing your only hardening furnace for the cost of a couple drugstore batteries.
Key person insurance is a deceptively simple idea, but it’s important to get it right. Don’t lose your business for the cost of some insurance premiums. Know who the key people in your company are and protect them with both good management and well thought out life insurance. We can help. At TB Group, we understand you are building something to last, and we know the ins and outs of key person insurance. Click here to set up your consultation with us.
Photo: “Brass Ornate Vintage Key on Black Computer Keyboard” by Pixabay via Pexels.