What Is Key Employee Insurance?

Key employee insurance pays businesses a sum of money if a critical staff member dies or contracts a serious illness that may lead to disability or a substantial time away from work. Losing important personnel can cause substantial losses for a business and may expose it to risks. Business owners can carry key employee insurance to protect themselves from some of this risk, and to prepare for unexpected events. It is a life insurance policy paid out to the business in the event of a death.

The definition of a key employee can depend on the organization. Such staff members may have unique skills and abilities that are difficult or impossible to replace. They could also have a large base of loyal customers who prefer to work directly with them, which could cause problems in the transition after a death. Key employees may be valued by staff, including personnel they supervise and work with who would experience disruption if they left work suddenly. Identifying critical members of staff can help a company determine if it needs key employee insurance.

One concern with losing key employees is that they may be expensive to replace. Companies need to seek appropriate replacements and then interview, hire, and train them. This can take a substantial amount of time in addition to money. During the transition period, customer confidence may decline, staff can be distracted, and the business might experience a credit rating hit. Loss of a key employee can also expose companies to risks like being unable to buy out the dead employee’s share to settle an estate and avoid sale or takeover.

Companies can use key employee insurance to access a cash payout which will provide assistance in the event of a death. There are two different ways to approach the value of the policy. One is to estimate how much it would cost to replace the employee, based on the time spent and other associated expenses. Another option is to consider how much money the employee brings in for the company on an annual basis. The loss of the staff member could result in losing some or all of that income, making it reasonable to insure against it.

Some ethical issues can be involved in key employee insurance. Staff members may be concerned about the company’s desire to carry a life insurance policy on them and how this might affect their own insurance policies. Insurance agents can provide specific information about how the policy works and may help key employees make plans for unexpected events so their families will be provided for in the event of a sudden death or disability.