Key person insurance can include life insurance, critical illness insurance and disability insurance that is purchased by a company on any employee that is key to the business operations. If that key employee were to be unable to work due to death, disability or illness, there could be a significant impact on the stability of the business. In this case, we are going to specifically explore key person critical illness insurance. Minimizing the financial burden on the business if you, or another key employee is diagnosed with a critical illness can help save your business. The insurance payout could be used by the business to cover expenses while the employee recovers or even fund the cost of finding a replacement if the key person leaves the business.
A key person critical illness policy is identical to an individual policy, but the business is the owner and beneficiary of the policy. This way, the company has control over the policy, pays the premiums and will also receive the payout if the employee makes a claim. Since the policy pays out a tax-free lump sum of money, there are no restrictions on what the funds can be used for within the business. In many cases it is used for ongoing expenses including salaries, making required debt/loan payments, and even paying any retirement entitlements if the key person decides they are no longer going to be working after their illness.
The amount of critical illness coverage required varies. Each company has unique coverage needs that will depend on the perceived value of the key person to the business operations. The need for critical illness coverage is more complicated than life insurance, as there is a possibility of the employee returning to work after a period of time away. However, the business may want to consider the key person’s salary as an estimate for the cost of a potential replacement. Additionally, it is important to factor in the monthly expenses of the business and any required payments on outstanding debt. The next decision is the amount of time the business needs these expenses covered – is it 3 months? 6? Longer? Each business and key person within that business may require different levels of coverage, which may also evolve over time as their role changes, or the business grows.
In addition to considering the coverage amount, the term of the policy is also important. The ideal term will provide coverage for the expected years of service remaining for the key employee. If the employee is expected to be working until age 60, you would want to ensure that the coverage is in place until their retirement.
An individual that produces a large volume of clients or sales.
Within sales departments of organizations, there are often key employees that may generate a significant portion of the overall sales or customer leads. If this particular person required time off of work because of a critical illness, the overall revenues of the company could decrease significantly and pose difficulties for all departments and employees.
A person with a unique skill or intricate knowledge of the company.
In many cases, especially in smaller to medium sized businesses, there may be individuals that have unique abilities or understanding of the product, service, or business as a whole, critical to the overall success of the company. It may be you, the owner, a department head, or a product developer. Regardless of the role, it is important for the longevity of the business that proper coverage is in place.
Your business currently has loans outstanding or is looking to secure one in the future.
Lending institutions may require certain key persons to be insured before offering a loan. This provides them with security in the form of collateral rights, to a portion of the critical illness payout, for the outstanding balance of the loan, or security for the ongoing payments. Although not every lender requires a policy to be in place, it might be prudent as the owner of the business to consider putting key person insurance in place anyway to ensure you have the funds to keep up with your payments as needed.
If the business no longer requires the key person critical illness insurance coverage to protect their business in case of illness, the company has the option to offer a transfer of the policy to the employee. This could be done by transferring the ownership to the individual so that they can continue to pay the premiums and become the beneficiary of the policy. Due to the fact that critical illness insurance doesn’t have a cash value like some life insurance products, it can be transferred quite easily. If the individual is not interested in maintaining the policy personally, it can simply be cancelled at any time, without penalty.