Key Man Insurance

Let’s take a look at your business for a second. Ask yourself this question – what is the most important asset in your business? Is it the brand and goodwill you’ve painfully cultivated over the years? The intellectual property, patents, or copyrights that you’ve spent thousands – maybe even millions – in R&D to create? What about your physical assets? Maybe it’s your factories and machinery that give you the edge over your competition. Or maybe it’s the data that you’ve collected. After all, the CEO of Intel was quoted saying “data is the new oil”.

If you answered any of those, I would argue that you’re wrong. The most valuable asset you have at your company is the human capital. All growth, innovation, and the other assets that you might have named start with your employees.

So how do you value your most valuable asset and how do you protect it? After all, you purchase insurance to insure your business property so why would you not do the same for your most important assets: the key people in your organization?

Who are the Key People in your organization?

A Key Man (or woman) is someone who has some specialized skills or knowledge. The loss of this person would hamper the company’s ability to make money and remain viable as a business.

Examples could include: founders, CEO’s, directors, top sales people (the rainmakers), chairman, or other technical specialists that carry a wealth of knowledge and are key to the continued success of your organization.

If any of these people die, become disabled or suffer a critical illness, it doesn’t take much to imagine the effect it would have on the organization.

Examples include: loss of profits, loss of expertise leading to decreased competitiveness or loss of relationships or good will (especially for top sales people). Replacing these people would entail significant recruitment or training costs and could also lead to lost profits.

If this loss of these people can have such a devastating effect on your business, why wouldn’t you put risk management steps in place to protect them like you would with any other asset?

What are my Key Man Insurance options?

What we recommend for situations like this is to purchase a life insurance policy for your key personnel. This is different from life insurance provided through your employee benefits plan in that any payouts would be paid to the business.

What happens is that the insurance company will purchase a life insurance policy on the lives of a key person. The company would pay the premiums for this and be able to receive a lump sum cash payment if the key person dies or is disabled (subject to the terms of the policy).

This lump sum payment can then be used to compensate for lost profits or cover recruitment and training costs. That money is free for you to use as you see fit.

How much Key Man Insurance should I buy?

The amount of cover you should get depends on the contributions of that key man to the company. There are 2 ways to calculate the limit of insurance you should purchase. You can use a multiple of salary or a multiple of profits.

With the multiple of salary method, you should be insuring that key person for anywhere between 5 to 10 times that person’s annual salary.

If you use multiple of profits, you should be insuring the key person for 2 times the average gross profit that person has brought in over the last 3 years. Or, you can use 5 times his net profit over the last 3 years.

Which method you choose will depend on the type of employee you’re insuring. It would be very difficult and time consuming to figure out the profits attributable to a particular researcher or scientist. But it would be very easy to do the same for a salesperson.

Other Risk Management steps

Aside from insurance, there are simple steps you can put in place to manage your risk and reduce the fallout from the loss of a key person.

One good piece of advice is to prevent top executives from traveling together. This reduces the chances of you losing your core team all at the same time. This concept is similar to airlines forcing pilots to eat different meals.

Another best practice to implement is to cross train your staff or employ a knowledge base, internal Wiki page or a feature-rich CRM to make it easy for your team to log and share information with each other. This reduces the potential loss of expertise that comes with the loss of a key person.

Contact a Trusted Union insurance advisor today for more risk management tips and to get a quote for your key man insurance.