How Key-Person Insurance Could Help Protect Your Business
Keeping a successful business thriving during a crisis is job No. 1 for any owner or operator. Key-employee insurance can be an important part of that protection strategy, but you’ll also want to examine several related issues.
Here are seven essential steps – part of your general business-continuity planning – that can help you overcome many potential threats to business survival.
1. Make a Plan
The focus of any business continuity plan includes identifying and managing issues that may put your business at risk, such as the loss of a key employee. Developing a viable succession plan is one way to directly impact your business’ longevity, yet only 30 percent of small businesses have a written succession strategy in place.1
The first step is to define who your key employees are and to identify the most critical company functions. While maximizing retention of your key management team should be a top priority, you also should be building a broader field of possible successors for all critical roles. You can achieve this by extending learning and development beyond the skills necessary for success in the current position to those required to succeed in the next role – better yet, in several possible next roles.
In addition, supporting formal mentoring makes it easier for every key employee to prepare his or her potential replacement. The goal is to deepen your business’ bench strength in vital jobs – before a triggering event occurs.
2. Identify your MVPs
Who are the most-valuable players on your team? Most businesses have a core group of essential employees whose leadership, unique skills and competencies are crucial. These individuals are generally senior-level, highly compensated employees who make a substantial contribution to the company’s profitability, knowledge base and ongoing operations.
In addition to the founder, owner or corporate officers, they also can be individual contributors with pivotal roles. That might include top performers in sales, finance, or technology, as well as innovation and R&D chiefs. The deciding factor: Without them, your business would experience a financial hardship.
3. Assess the Risks
Once you’ve identified your key employees, you need to evaluate your potential sources of loss. To get a sense of the scope of the risks you face, ask yourself some questions about what would happen if you lost a key employee unexpectedly.
Imagine the scenarios:
- Would sales and profits tumble?
- Would you potentially lose established clients or suppliers?
- Could the loss impact employee confidence, productivity and retention?
- Could your bank reduce or retract any lines of credit?
- Could suppliers tighten payment terms?
- What’s the chance of a business loan being called?
- How long might it take to find, hire and train a successor, and at what cost?
Use the answers to gauge the depth of the impact and improve your readiness to respond.
4. Calculate the Economic Impact
Quantifying the loss of an essential employee isn’t always an exact science, but it’s a necessary step to help determine the level of protection you need. Among the losses associated with a star employee’s absence, for example, are reduced sales and profit; the cost of executive search, recruitment and relocation fees; training costs for the employee’s successor; and any required debt repayment or increased borrowing costs.
And while it’s difficult to put an exact price on a key person’s value, many businesses use three common measures to estimate it:
- A multiple of salary/total compensation
- Contribution to company profit
- Replacement costs.
5. Protect Critical Knowledge
Now that you’ve assessed the risks and gauged the impact, there are other simple ways to safeguard your business’ assets. By cross-training your key staffers in major business operations where possible, you’ll be able to tap into greater versatility and capability across functions if the need arises.
One way to do this is to encourage and reward work opportunities for employees across projects or divisions. Another way is to identify and expand the niche expertise that probably exists within your inner circle. This so-called level of “deep smarts” is what separates novices from experts. For example, your financial wizard might be able to spot an error in numbers on a document quicker than anyone else on your team — something that would escape the notice of less-experienced employees. Such “gut” knowledge can often be crucial during a crisis.
The upshot? Developing a knowledge-transfer process among key people and their potential successors can help. By sharing and documenting how work gets done, you’ll capture critical information.
6. Improve Recruitment
Along with your internal succession plan for key jobs, your external recruitment plan should map out the strategy for attracting and hiring the best qualified candidates for all top-level posts. Sourcing new talent, having a ready search committee in place and analyzing position descriptions as your company changes and grows should be ongoing practices.
Also, negotiate with search firms and staffing agencies to help speed your talent management process. For example, your retained search partner should understand time-sensitive hires and high-profile specialization – and dedicate a recruiter full-time to swiftly source and deliver a panel of qualified candidates.
7. Consider Key-Employee Insurance
Given the risks involved, key-employee insurance can be a cornerstone of your business-protection strategy. How much insurance you purchase will depend on your financial-replacement needs balanced against what you can afford in premiums.
When a business buys key-employee coverage, it owns the policy, pays the premiums and is the beneficiary. The insured employee must agree to the company’s purchase of this insurance with written consent. The policies are generally available in both renewable term and whole, or cash-value, variations, and age, gender, and current health and lifestyle status can influence rates.
Because key-employee insurance requires an “insurable interest,” the level of coverage should accurately reflect the profits at risk. In other words, a realistic risk of loss must justify the need. Generally, your aim is to align coverage amounts with the projected financial impact a key person’s death or disability would create.
1 SSA (2017). Web page: Face Sheet – Social Security. Retrieved December 29, 2017, from https://www.ssa.gov/news/press/factsheets/basicfact-alt.pdf