How Does Key Person Insurance Work?

Most organizations employ at least one individual who is essential to their success. This person may be a partner, majority stockholder or someone with unique expertise or a business-critical skillset.

When a key person leaves, your business will likely be faced with a significant resource gap. If a key person’s exit is a planned retirement or voluntary termination, you’ll have time to prepare and take the necessary precautions to minimize the impact.

However, if their departure is unplanned due to a sudden, disabling accident, your business will be exposed to financial risks. Key person insurance is designed to help offset this risk. Key Man Insurance coverage can protect your organization’s solvency in the event that you lose the key person or people without warning as well as the investments made by lenders and investors in your business.

Ways To Identify A Key Person

Your company may take out key person coverage on you if you earn at least $110,000 and fall within the top 20 percent of the company’s salary earners. Of course, before your company takes out a policy, you must consent to the coverage.

If you fall into any of the descriptions listed below, you may want to discuss key person coverage with your employer or, if you own the business, with your employees. Key person insurance coverage is crucial for:

  • Employees who would be extremely difficult, time-consuming or expensive to replace
  • Highly skilled employees with unique training
  • Employees with exclusive ties to key clients, such as celebrities
  • Employees who are company leaders and have irreplaceable knowledge
  • Small business owners who would face financial hardship in losing a key staff member, employee or client

In addition to proper coverage, a business continuity plan that outlines how your business will function if you should suddenly lose key employees is essential.

Coverage That Helps You Fill A Resource Gap

With key person coverage, the employer pays the premiums and serves as the beneficiary in the event of the employee’s disability. Tax-free dollars from the policy can be put toward finding, hiring and training a replacement employee, compensation for lost business during the transition and/or financing timely business transactions.

A key person policy is used to protect your business, not the key employee—if the key person becomes disabled, key person insurance coverage proceeds can be used by the company for any purpose. Premiums are based on several factors, including the key employee’s age, physical conditions and health history. The amount of coverage also affects the premium.

In addition to proper coverage, a business continuity plan that outlines how your business will function if you lose key employees is an essential risk management tool.

An ALIGNED Advocate can provide more information about key person coverage and business continuity planning.

ALIGNED Across Canada   

100% Canadian owned, ALIGNED is a premiere insurance brokerage that serves more than 1,400 clients across the country. ALIGNED’s offices in Toronto, Calgary and Vancouver are supported by a national operations centre in Cambridge, Ontario. Uniquely within the industry, ALIGNED creates, negotiates and delivers the best business insurance and risk management strategies/solutions to organizations like yours.

Sources: The Globe and Mail  All rights reserved. For informational purposes only. The information provided herein is not intended to be exhaustive, nor should it be construed as advice regarding coverage.

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