If your company is like most, you probably have key employees whose knowledge and expertise are essential to your organization's ongoing success. Think about the potential consequences if they were suddenly unable to work due to death or disability.
According to a survey by the National Association of Insurance Commissioners (as reported by the Insurance Information Institute), 71 percent of business owners reported that they were dependent on one or two key employees for their businesses' success. However, only 22 percent of respondents said they had obtained key employee insurance. These figures make it clear that many employers are leaving themselves open to financial loss in the event of losing a key employee.
What is key employee insurance?
If a key employee passes away or is rendered disabled, this type of insurance will compensate a business, allowing it to lessen the loss experienced by losing a valued team member. If a vital employee is no longer able to work, it can have dire effects on a company's financial future, so key employee insurance acts as a cushion to help businesses work through a tough time and get back on track.
How much key employee insurance is necessary?
While every business' needs will be different, there are some strategies you can use to calculate how much key employee insurance is prudent. Analyzing an employee's responsibilities can give you a good idea of how much insurance might be necessary. For instance, if an employee is responsible for a certain amount of sales revenue, you should take this into account when determining insurance amounts.
Steven Schwartz, vice president of executive benefits at HUB International Northeast, says that a business should try to calculate how much profit is attributable to an employee, as well as how many years it will take to fully replace it. Besides the obvious loss of revenue resulting from the death or disability of a key employee, it's important to take the costs related to replacement into account, as this may include employment agency fees and a difference in salary.
What type of key employee insurance is advisable?
When purchasing key employee insurance, your HUB broker will advise you on the type of coverage that will best meet your needs. For instance, term insurance is recommended for shorter-term needs, according to Schwartz. For employees whose time at a company is anticipated to be of a longer duration, cash value policies might be a better fit.
In addition, it's important for companies to understand the difference between key employee life insurance and key employee disability insurance. While life insurance policies are more widely used, there is actually a greater likelihood that a key employee may become partially, totally or permanently disabled.
How important is key employee insurance?
According to Schwartz, the use of key employee insurance is becoming an even greater concern in today's business market. As the economy continues to improve, more mergers and acquisitions are taking place. In order to protect their investment, private equity firms are increasingly taking out key employee insurance policies on principal employees and senior managers, demonstrating that key employees are just as important to major corporations as they are to small and mid-sized businesses.
Purchasing key employee insurance
After you decide to invest in key employee insurance, it's important to speak with a professional. A HUB International broker will be able to walk you through the process and advise you on the best course of action for your business. An insurance advisor who specializes in key employee insurance understands how insurance carriers look at risks and can use their working relationships with underwriters to help you find a policy that works for your company.
It's essential to be completely open and honest with your broker regarding your company's finances, as well as the health of the employee you want to insure. By providing a HUB advisor with the proper information, you can ensure you'll find the best solution to protect your business.
As Schwartz puts it, "There are many success stories about prudent businesses that exhibit quality risk management by insuring their key people. The cautionary tales sometimes end up as headlines in newspapers, such as the 1989 helicopter crash killing three high-level executives of Donald Trump's casinos in Atlantic City. Trump contended that his casinos lost revenue, had increased operating costs and incurred expenses to hire new executives, in addition to paying survivor benefits to the beneficiaries."
Regarding the cost of key employee insurance, Schwartz added: "I always convey to my clients: The premium isn't the problem…it's the solution."
Speak to a HUB International broker to explore your options and find out which type of policy would best suit your company.
