The continuity of a company depends to a large extent on the skills, knowledge and experience of certain key people within the organization. The sudden loss of one of these individuals can have a significant impact on operations, stability and business growth. To mitigate this risk, companies can resort to key person insurance or “Key Man” insurance.
What is a key person insurance?
A key person insurance is a life insurance policy taken out by an undertaking on one or more employees considered essential for the operation and success of the undertaking. In the event of death, serious illness or disability of that person, the company receives compensation which it can use to address the challenges arising from his absence.
Benefits of Key Person Insurance
The main benefits that this type of insurance can offer to an organization are detailed below.
- Financial protection: Compensation received may cover financial losses, recruitment and training costs of a replacement and any other interruption in operations.
- Operational stability: Ensures the continuity of projects and strategies that depend on the skills and knowledge of the key employee, minimizing the impact on daily operations.
- Investor and partner confidence: Demonstrates to investors, business partners and employees that the company has a solid contingency plan, increasing their confidence in the stability and viability of the business.
- Improved business credit: Financial institutions may see the existence of a key person insurance as an additional guarantee that the company is prepared to deal with contingencies, facilitating access to credit and better financing conditions.
- Provide stability in a process of generational change of shareholders: The compensation received can cover transition costs and facilitate business continuity for new generations of shareholders. This provides confidence to the heirs and ensures successful succession of the family business.
How does a key person insurance work?
Knowing how a key person insurance works is essential to making the most of this risk management tool. From the identification of key persons to the collection of compensation, each step in the process is crucial to ensuring that the company is adequately protected.
- Identification of key people: First, the company identifies employees whose skills, knowledge or roles are crucial to business success. These may be founders, executives, sales managers or product developers, among others.
- Policy Signing: The company signs the life insurance policy on behalf of the key person. The company is the beneficiary of the policy, not the employee or his family.
- Determining the limit to be insured: The amount of coverage required is calculated, taking into account factors such as the financial contribution of the key employee, the costs of recruitment and training of a replacement and the estimated time for the company to regain its stability.
- Premium payment: The company pays insurance premiums, which may vary according to age, health and contracted limit.
- Compensation Claim: In the event that the key person dies or suffers a serious disability, the company receives compensation agreed in the policy which it can use according to its specific needs to maintain operational and financial stability.
In short, key person insurance is an essential tool for business risk management. By protecting against the loss of vital employees, companies can ensure their continuity and resilience to unforeseen events. Investing in this type of insurance not only provides peace of mind, but also strengthens the company’s position “vis-a-vis” investors, partners and employees.
The O.Brokers team is at your disposal to advise you on the best solution for your company. Contact us for personalized guidance.
