What is the “key” to the success of a business? Is it producing, selling, goal setting, strategic planning, managing change, commitment to customers, honesty or leadership? If your business or the organization that you work for has achieved success, you could probably pinpoint the reasons, and in many cases, the person responsible. That person isn’t necessarily the owner or CEO of a corporation, but that person or persons would be considered key to its success.

These key employees are critical to the long-term performance of a company. Losing one of these essential people due to a death or disability can have a damaging effect on any business. If you are in business with a partner, look at your partner’s spouse, children and other heirs. Do they know the business? Do they care? Your partner’s share of the business will be inherited by someone, and the business may need to buy out that person’s share or dissolve the business. If your company is a professional services business and key employees cannot be replaced expeditiously because of legal or ethical restraints, you could be in trouble—a law firm or medical office cannot replace a 20-year veteran with a new graduate.

The solution to protecting a business is “Key Person” (formerly known as “Key Man”) insurance, which is a life and/or disability policy taken out by the business as a beneficiary in the event of death or disability to a particular key employee. Key person insurance provides the financial means to stabilize a company during the adjustment period after the loss of a key employee or executive. After such a loss, the business could lose critical management skills and may experience periods of falling sales and productivity. Additionally, significant costs will be incurred identifying and training the person or persons who have the ability to take the place of the key employee. These policies are designed to protect the business, not the key employee.

Insurable losses can provide compensation in several ways: to provide temporary personnel during the extended period when a key person is unable to work; to protect profits from lost sales; to protect shareholders or partnership interests—typically this is insurance to enable shareholders’ or partnership interests to be purchased by existing shareholders or partners.

How does this insurance work? Using life and disability insurance, a business can buy policies on the key employees to cover the amount of funds needed to adequately replace them in the event of a death or disability. In most cases, the cost associated with securing key person insurance policies is very small relative to the potential benefit if a key worker dies or is disabled. With both life and disability insurance, the business secures the policy on the life of the key person. It will own the policy, pay the premiums and be the beneficiary in the event the key employee dies or is disabled.

When we start a business based on our own unique skills, we have a difficult choice when we get too busy to cope with all the work our expertise has created. We need to spread the load by employing others to do some of the work. This is the critical point in the business development. Many owners wish they could clone themselves. Business growth is always stifled by the owner hanging on to the work he or she enjoys. If you have made the choice to grow, the key to unlocking the potential is to train the new people to do better than you. Just make sure that the life/disability policy for your key employee(s) is not the only one you purchase—don’t forget to protect your family along the way; you are definitely a key person to them. iBi