Small businesses and startups are the engines that drive our economy, but those small businesses and startups are often critically dependent on the skill set and drive from a relatively tight group of key players. Consider for a moment what the loss of vital person might mean to your company. The loss of a major partner in your enterprise would present immediate challenges which could easily snowball and result in unforeseen – and difficult to mitigate – consequences to the growth of your dream business.
Who Is A ‘Key Person’?
In small-to-medium sized businesses, the key person could be the business owner, a top sales exec or a brilliant financial or marketing officer. So what would that mean to the growth of your enterprise should one of those key people to suddenly die or be unable to fulfill their job function? A painful period of transition is sure to result, at least until a suitable replacement can be recruited, and should an owner die, it could spiral into the end of the company entirely. Losing a top sales exec might mean losing accounts crucial to your success.
The ‘key person’ is someone who’s efforts are vital to the success of your company; a person who can’t be easily be replaced and whose knowledge is key to the future of your company. If you fail to plan for the loss of a key person, and the impact that loss would have on your organization, you could be on the brink of failure. But you can take some relatively simple steps toward ensuring that your business will be properly prepared for the unexpected.
Key Person Life Insurance – Companywide
Key person life insurance has several benefits for your company; it provides a cornerstone for the development of a business continuation plan, it could provide the economic foundation which allows you to find a replacement and it could fund a window in time to that allow that new partner to acclimate themselves to their duties.
The death of a company owner doesn’t necessarily mean the death of the company, but only if your planning is properly executed. Key person life insurance can be used to pay existing debt and allow for the orderly transition of duties and assets to take place.
Do You Need Key Person Life Insurance?
The need for key person life insurance is, to a large extent, dependent on the details and circumstances of a particular organization. If you haven’t made time to consider the impact to your business which would result if you or key associates are lost, you’re ignoring a keystone of the ongoing viability of your concern going forward.
Let’s create an example: your start-up grows to 30 employees but, 12 months in, one of the four founders unexpectedly dies from cancer. As the impact of the loss of a friend and partner takes hold, the ability of the remaining partners and employees to focus on business suffers and the business fails.
In this scenario, a properly structured Key Person insurance plan would have allowed the principals to walk away with at least some financial compensation. While that compensation would in no way make up for the loss of a beloved and trusted associate, it would have provided the key players with at least some return on their investment.
Anthony O’Brien of MoneyMag knows the personal toll the loss of a friend and colleague can have on a business.
O’Brien suffered the loss of his long-term business partner, friend and fellow Money writer Chris Walker to cancer.
“I won’t dwell on the details of his illness but, over the past couple of years as his health deteriorated, Chris urged me to apply for ‘key person insurance,'” O’Brien wrote of his experience. “Sensible advice given his health status. However, I’d had income insurance for years, and deemed it would cover me sufficiently if something happened – so I ignored Chris’s advice.”
You can read the rest of the story in O’Brien’s piece on the experience here.
The takeaway you should have is a simple one; the loss of a Key Person to your business or startup will have a whole host of consequences and any planning you can do to mitigate the loss of a major player to your enterprise will ultimately serve your goals and pay dividends over the long haul.