When (and How) To Buy Key Person Insurance

“The graveyards are filled with irreplaceable men.” – Gen. Charles de Gaulle

Dynamic businesses are often created and led by very special people with very unique abilities. It is difficult to visualize Tesla without Elon Musk or Berkshire Hathaway without Warren Buffett. But while these individuals embody the creative success of their companies, are they truly irreplaceable?

To stock analysts, too much dependence on one person is a problem called dependency risk, something which is gradually reduced as a growing company divides authority and documents intellectual property.

However, while dependency risk remains, a growing company can literally be destroyed by the death of one individual. The solution to this problem is key person insurance. The purpose of key person insurance is to buy the company time to either replace the key person, or to repurchase their share of the equity, or to provide funding for an orderly dissolution of the business.

Typically, the company pays the premiums and is the paid beneficiary if there is a covered loss due to the death or incapacity of the insured person. The key person signs off on the policy to give the company these rights.

Risks Covered by Key Person Insurance

Key person insurance can protect the beneficiary company from a variety of losses, which may include:

Loss of Personal Services – Coverage to offset the loss of business standing or financial viability which is dependent on a key person’s name, reputation or unique skills.

Lost Profits – Coverage to offset lost income from interrupted sales or from cancelled projects which required the key person’s technical knowledge or sales network.

Shareholder Interest --  Coverage to enable the surviving partners or shareholders to buy out the interest of the deceased person, freeing that equity to attract another key partner.

Loan Guarantees – Coverage to settle loan or line of credit guarantees made by the deceased person. The specific coverage would be equal to the amount guaranteed.

Dissolution – When the surviving owners decide that a business cannot succeed without a truly irreplaceable person, the proceeds may be used to settle debts, pay severance to employees and otherwise close up the business in an orderly manner rather than going bankrupt.

Typical Costs of Key Person Insurance

The monthly cost of a key person policy depends on the type of business, the key person’s role, and the amount and type of coverage desired. Owners should have a clear idea of whether they want to be covered for closing the business, or for working their way back to recovery without the key person.

Based on your goals, quotes can be obtained for ranges of coverage from $100,000 to $1 million or more, again depending on the business. Monthly premiums may be as little as $100 to as high as $2000, based on the amount of coverage, as well as the age and health of the key person.

Review Your Goals (and Quotes) with an Impartial Advisor

To maximize the value of key person coverage, review your risk scenarios, your recovery options and your quotes for coverage with an experienced and impartial business advisor. Insurance agents have products to sell, but a financial advisor is in business to determine what is best for the client.

For more information about dependency risk and key person coverage, schedule a free consultation today!