What is the purpose of key person insurance? (One of the reasons might surprise you)
For any business, the sudden, unexpected loss of any individual can be a significant blow. Not only does their passing devastate their family, but their absence in the business can seriously damage company productivity, focus and revenue.
Key Person Insurance is an employee benefit designed to reduce the financial impact of an important colleague dying in service. But what is it, and how does it help?
In this article, we define and describe Key Person Insurance, before delving into the details of how it can support your business. One purpose may surprise you!
But first, who (or what) is a key person?
Who is a key person?
A key person is someone who holds a critical role in your organisation, and whose absence can severely impact the operations and profitability of the company. This could be a CEO, a founder, a top salesperson, or any individual whose skills, knowledge, and experience are essential to the success of the business.
Key Person Insurance meaning
Key Person Insurance is a policy that provides financial protection to businesses in the event of the death or disability of a key employee.
It's important to note that Key Person Insurance is not only for large corporations. Small and medium-sized businesses can also benefit from this type of coverage.
In fact, it may be even more critical for small businesses, as they may have fewer resources to withstand the loss of a key employee. A Key Person Insurance policy can be tailored to the specific needs of the business, and the coverage amount can be adjusted based on the employee's role and contribution to the organisation.
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Key Person Insurance benefits
Reduce financial impact
The primary purpose of key person insurance is to mitigate the financial impact of losing a key employee. The loss of a key person can lead to reduced productivity, loss of clients, and increased costs due to recruiting and training new staff to replace the person lost. In some cases, it could even lead to a decline in revenue and/or the closure of the business.
Key Person Insurance helps businesses to manage these risks by providing a lump sum payout to the company in the event of the death or disability of a key employee. The payout can be used to cover the costs associated with hiring and training a replacement, paying off debts, compensating for lost profits or any other expense that the company may face as a result of the loss.
Give peace of mind
Secondly, on an emotional level, Key Person Insurance also provides peace of mind to business owners and shareholders. It assures them that the company can survive the loss of a key employee and continue to operate even in difficult circumstances. This helps business decisions to be made confidently, as decision-makers know that they have contingency plans should anything untoward happen.
Protects your brand
Finally, Key Person Insurance also protects the company's brand. At first glance, it might be surprising to consider the link between Key Person Insurance and a company’s brand, but if we take “brand” to mean the more comprehensive and accurate “ reputation of the company”, we can soon see how losing a key person might impact it.
The payout that a company receives from the Key Person Insurance scheme allows the business to hire someone to fulfil the responsibilities of the individual who has passed away. A key person includes anyone who is crucial to fulfilling the contractual obligations a business has to its clients and suppliers. If a company is not covered by Key Person Insurance and did not have the funds to hire someone (or get a temporary replacement) to cover the work of that person, the reputation of the whole brand could be at stake.
This could have ramifications long-term, with disappointed clients not referring the company to others and potentially leaving bad reviews online. If left unaddressed, the fallout could negatively affect a company’s reputation, growth and revenue.
Buying a Key Person insurance policy safeguards your company’s reputation as it allows you to meet a Client’s expectations regardless of events happening internally. In this way, Key Person Insurance actually helps your marketing aims long-term.
Reduce financial impact and protect your business
In conclusion, key person insurance is a valuable tool for businesses of all sizes to protect against the financial impact of losing a key employee. It provides financial security and peace of mind to business owners and shareholders and can help to maintain your company’s reputation, allowing you to grow and thrive long-term. It's crucial for businesses to consider this type of coverage and to work with an experienced insurance professional to ensure that they have the right coverage in place to protect their organisation.
