Why Key Person Insurance is Vital for Growing Businesses

Why Key Person Insurance is Vital for Growing Businesses
Image credit

When you think of businesses, the last thing you think about is life insurance, right? They don’t really need to go together, and it doesn’t really seem like they go hand in hand in the slightest. But honestly, as businesses expand and evolve, they face an array of challenges, from financial fluctuations to market uncertainties. Amidst this dynamic landscape, the people driving the company forward hold paramount importance. 

This isn’t a business like a sole proprietor or a business that has no employees, but a business that is at least medium to large. In fact, sometimes there’s that one person in the business who knows best and really keeps the whole operation together. So think of it this way: what would happen if the main person who’s running the business, the mastermind, were gone? What would happen if they suddenly become unavailable? 

That’s where key person insurance comes in. It’s not something that a lot of businesses know about, but if you have a business of a decent size, then it might be best to look into it. But why? What’s the impact? Well, here’s what you need to know!

What is Key Person Insurance?

This is basically a type of life insurance. Key person insurance, often dubbed key man or key employee insurance, is a specialized form of life insurance. But this isn’t just the standard life insurance that everyone is recommended to get, as it is strongly tied to the business, usually the business owner or a key employee who makes a massive impact on the company itself. 

It insures key individuals within a company whose contributions are vital to its operations and profitability. If they were to pass on, the company would be at risk, so this is a way to stabilize the business once their passing happens. So basically, this insurance provides the business with financial protection against potential losses. 

But, like many insurance companies, the payout is, little by little, an annuity. When it comes to a business with employees to pay (who have families to feed and shelter), annuities aren’t exactly a saving grace. So that’s why many businesses will look into routes like Annuity Freedom when they’re getting the key person insurance situated. 

Why Does This Matter for Growing Businesses?

Like what was stated above, this isn’t going to work if you’re the business owner and the whole business is just you; there needs to be more people. This is something that usually extremely-niche businesses have, or even medium to large size businesses (but usually not corporate level). But saying that, there are some pretty common reasons why businesses will use this type of insurance:

Mitigating Financial Risks

The loss of someone specific in the business could outright destroy it or at least really derail it. Operations can’t be disrupted, and financial stability is still needed. This doesn’t solve the issue itself, but it does at least help soften the blow since it is more of a safety net. 

Protecting Assets

Growing businesses often invest substantial resources in key personnel, nurturing their skills and expertise. This helps ensure that the business can weather the storm without compromising its hard-earned progress.

Preserving Relationships

It’s wild to think, but sometimes clients, partners, etc, will leave the relationship it built with the business when this key person dies. So, in a way, this insurance helps maintain credibility, and it can help preserve relationships. What this means is that clientele and others will “jump ship” if they think this death will destroy the business. So, this type of insurance can be seen as a safety net. 

Facilitating Succession Planning

If you’ve ever watched HBO’s Succession, then you’ll probably have an idea what this means. As businesses grow, succession planning becomes increasingly critical. So, the Key person insurance plays a pivotal role in this process by providing liquidity to facilitate smooth transitions. It ensures that the business can navigate leadership changes without facing financial strain or operational disruptions.

Can Help Retain Talent

This basically follows up on earlier advice about jumping ship if things seem rocky in the business (especially when death occurs or is imminent). But it’s not only about stability; if you plan on getting Key Person Insurance out on employees, for instance, then this could be seen as beneficial, too. 

Talented individuals are drawn to organizations that prioritize their well-being and provide security for their future. Offering key person insurance as part of employee benefits packages demonstrates a commitment to protecting employees’ interests and financial security. 

Strategic Growth

This goes hand in hand with succession planning, so at the end of the day, it’s not just about having some cushioning; it’s also about growing the business. Growing businesses are often in the midst of expansion and strategic initiatives. So, having to deal with the loss of a key individual can derail these plans and impede progress. 

Any business does not want to deal with this, so that’s why Key person insurance can come in handy. It provides the financial resources needed to weather such setbacks and stay the course with growth initiatives.

Can Anyone in a Company Use this Insurance?

Now, you might think that everyone in all positions could be insured like this. Then the whole company would have a competitive advantage and be unstoppable! But it doesn’t really work that way. This has to be a key person (hence the name) who makes a massive impact within the business. 

This absolutely needs to be someone who, if gone, would cause the business financial instability and loss of relationships and basically make the entire business go south within an instant. These individuals often hold leadership positions, possess specialized skills, or have extensive knowledge and relationships critical to the business’s operations and profitability. 

So, for example, if you’re running a tight-knit business and the owner and founder were to pass away, this insurance would work, but if it were someone in a less prominent position, like a secretary, it wouldn’t work at all. 

Print Friendly, PDF & Email

About Dequiana Jackson

Dequiana Jackson, Founder of Inspired Marketing, Inc., helps overachieving women entrepreneurs conquer limiting beliefs and create marketing plans that grow their businesses. This includes one-on-one marketing plan development, digital product creation, web design and content marketing. Dequiana is the author of Know Your Business: How to Attract Ideal Clients & Sell More and runs the award-winning blog, Entrepreneur-Resources.net.

Check Also

Simple Touches To Improve Your Employees’ Office Life

Image: Freepik When it comes to boosting office livability, you don’t necessarily need to undertake …

Leave a Reply

Your email address will not be published.

CommentLuv badge