Many, if not most, small businesses rely on a few key persons to handle tasks that are critical to the success of their small business. These key employees may be your General Manager, Sales Manager, Finance Manager, or Marketing Director, and may not be easily replaced. If an unforeseen event occurs that causes them to vacate their position, it could throw your organization into a tail spin: sales could be forfeited, marketing could be halted, and vendors and employees may see delays in their pay.
It’s also difficult to quickly replace the multi-year veteran who has a wealth of knowledge in your industry and small business. What’s more, if your small business is in a niche market, a capable replacement may not be easily found or readily available. Likewise, companies who employ personnel who work with patents or proprietary systems are especially vulnerable.
But that’s why key person insurance exists. In a nutshell, key person business insurance is a disability and/or life policy taken out by a small business in the event of a disability or death of a key employee. Also known as key employee coverage, key man insurance, and key executive coverage, key person insurance pays your business in the event of a loss of key personnel that can disrupt the successful operations of your business. It helps reduce the risk of the unforeseen loss of a vital executive or employee who is fundamental to the success of your business.
Besides the challenge of finding a quick and suitable replacement of an all-important employee, another reason key person business exists is for financing and future growth. Some banks and lenders, including the Small Business Administration (SBA), require this coverage in many cases before granting approval to extend credit or financing terms. Should your business go public or merge, this insurance coverage is typically required on board members and high-level executives. The additional security added by key man insurance is highly valued not only by financiers, but also investors.
In short, key person insurance is critical for a small business where the success of the company hinges on the skills, knowledge, and expertise of a few pivotal individuals.