Key-person insurance can save your business from the unthinkable

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Can your business survive the loss of its key employee? It’s not pleasant to think about, but losing a key employee to disability or death can result in the demise of a business. That’s where key person insurance comes into play.

Though not a must-have policy, key person insurance should be considered as part of a disaster plan or a succession plan, said Lyndon Narita, commercial account executive at San Rafael-based Minto & Wilkie, a division of George Petersen Insurance Agency.

“It is my opinion that a company, small or large, that has grown or benefited from the talents of an individual that provides unique expertise, service or vision, should purchase key person insurance,” Narita said. “In the event that the individual dies, the company receives the death benefit and decides how the funds will be appropriated.”

According to the Insurance Information Institute, small businesses tend to be more vulnerable than larger ones because they often depend on a single person, or a few key people, for their success.

“The loss of an important employee can hurt the morale of a business, but the financial impact can be mitigated if a business purchases key person insurance,” said Loretta Worters, spokeswoman for the Insurance Information Institute. “This type of coverage can enable a business to continue paying its bills and fund the search for a new employee. In unfortunate instances where a business cannot survive without the key employee, the funds from key person insurance can be used to pay severance to employees, distribute funds to investors and close the business in an orderly manner.”

There are some instances, however, when key person insurance is required.

“An emerging company, one that has potential, but needs funding, will be required to purchase key person insurance by the lender, bank or venture capitalist,” Narita said. “Larger, more established companies might have funds set aside as part of a disaster-plan budget, and may not need to rely on a quick influx of funds.”

Key person insurance can also pay expenses related to finding and training a successor, including an employment agency’s fees and the potential expenses needed to relocate the new person — and possibly finance a higher salary for him or her, Worter said.

“These policies can also fund obligations to the key person’s family, such as deferred compensation or continued salary,” she said.

Key person insurance is generally affordable, she added, with premiums ranging from approximately $100 per year to a few thousand dollars per year, depending on a number of factors, including the key person’s age, gender and health; the company’s structure and size, and the risk-level of a particular industry — or the key person.

“Someone like a Richard Branson is a skilled kite surfer, skydiver and sailor. He took a precarious flight across the Atlantic in a balloon. He’s a risk taker,” Worter said. “But many entrepreneurs have that same spirit — it’s what makes them so successful in business, but those risks need to be taken into consideration when writing insurance coverage.”

Staff Writer Cheryl Sarfaty covers tourism, hospitality, health care and education. Reach her at cheryl.sarfaty@ or 707-521-4259.

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