Man Holding a Stick Figure


Gregory S. DuPont Jan. 13, 2020

Just as many of us may tend to avoid contemplating the loss of those we depend on every day, business owners may often avoid preparing for the death of key employees. Yet, consider for a moment how such a sudden and unexpected event could affect your business. Suppose you lost your most productive sales manager tomorrow. What would you do to replace the revenue stream and customer contacts he or she generated? How long would it take to recruit a replacement, and bring that person up to speed? Would the loss affect company morale? Would other employees become worried and begin seeking new jobs?

Simple, Affordable Coverage

Today’s low term insurance rates provide an attractive opportunity for small businesses to protect themselves against the loss of key employees. Term insurance typically provides the largest death benefit for the cost. In addition, so-called “level term” policies provide coverage for a specified period¾usually five, ten, or 20 years¾while premiums remain level over the term stated in the policy. Therefore, you know in advance how much the coverage will cost.

There are some other alternatives, although they are generally more expensive. For instance, whole life insurance can provide key person coverage, yet it costs more than term insurance. However, in exchange for the higher cost, whole life coverage lasts for the insured’s lifetime, and accumulates a cash value you can eventually borrow against or withdraw.

Benefits After and Before Tragedy Strikes

Imagine what half a million tax-free dollars in death benefit proceeds could do for your company if you abruptly lost a key employee. You could offset lost revenues or profits, pay outstanding bills, or recruit and train a replacement. If lenders became concerned about the impact of the employee’s death, funds would be available to repay business loans. In addition, a key person policy can also benefit your business before disaster strikes. For instance, it may facilitate the approval of loans by assuring lenders they will be repaid.

Making the Decision

When deciding whether to purchase key person insurance, you need to weigh the premium cost against the financial exposure from operating without insurance protection. If you buy term insurance, and the employee lives until retirement, it will have cost you a relatively small sum. But, if you do not have coverage and a key employee dies, it could cost you your business. Therefore, the first question you should ask yourself is, “Can I afford to pass up key person insurance and potentially put my business at risk?” The answer will guide you to make the right decision.