As a business owner, you will be aware that there are some people working for your company who could be described as indispensable. These are the people who, if they are unable to work, would cause serious cash flow or operational problems for your business. Key person insurance helps to protect your business from issues like this.
When you are considering key person insurance, you need to decide which members of your team you wish to be protected against losing. This means that you will need to determine which members of your team are key to your success as a business. There are a number of different factors to consider.
Who Is A Key Person?
The definition of a ‘key person’ will vary from one company to another. Key people are determined by the way in which a particular business operates. For example, certain companies may find that their marketing manager is one of the most important members of staff. Other companies may realise that their IT specialist is key to ensuring everything continues to tick over nicely.
The definition of ‘key person’ will be as unique as your business. If you are looking to purchase ‘key person insurance’ for your company, you are going to need to think about the way in which your business operates and who is involved. There are a number of different elements which can be considered here.
What role does the staff member perform in the business?
Here you need to think about the organisational structure of your business and the way in which it generates money. This will enable you to determine how important a particular person is to your team. If the loss of a person will cripple your operations in both the short term and the long term, they are almost certainly a key person.
The CEO or Owner of the company will, in most cases, be incredibly important as it is often this person who drives the direction of the business. In a smaller business, this is one of the most important roles in the company as they are going to be leaving their mark on everything. The larger the company gets and the more independent each department becomes, the less important this role will be when it comes to ensuring everything runs smoothly.
As mentioned previously, you will need to think about the way in which your business operates. If your company relies on major projects to ensure that money continues to flow in, then your project managers will probably be defined as key people. If your business relies on the IT department to ensure that everything runs smoothly, then the IT Manager may be defined as a key person. If a particular piece of equipment or software is crucial to your business and you have only one person who truly understands how it all works, then this person is surely a key member of staff too.
When trying to identify these key people, ask yourself, would happen to your business if the person became severely ill or died? If you are fairly confident that there will no noticeable dip in company productivity and profitability should a person be unable to work for extended periods of time, maybe even unable to work permanently, then they are probably not going to be defined as a key person.
How easy is to replace the staff member?
While a person may be important to the way in which the business runs, if they can be replaced at the ‘drop of a hat’ it is unlikely that you will need to purchase key person insurance for them. So, if there are an abundance of people out there with exactly the same qualifications and experience as the person who is unable to work, then they are probably not going to be defined as a key person.
Key people tend to be those who bring something different to the table. For example, if they are able to inject a certain type of creativity into the role which you would be hard-pressed to find anywhere else. These are the people that, if you lose, would be tough to replace as there is nobody else quite like them out there. You may find somebody similar, but they are not exactly the same.
Sometimes lenders will stipulate a requirement to have key person insurance in place for particular staff members. If you have financing in place already, or are close to sourcing financing for your company, then you should listen to this advice. Lenders tend to be experienced in the world of business, and if they identify certain members of your team as key people, then you should define them as such too.
It may take a bit of time to identify your key people, but if anything does end up happening to one of these staff members, you will be glad that you put the effort in at the start. It could mean the difference between losing your company and ensuring that everything is able to continue as normally as possible.
You may also like to read: The Benefits Of Having Key Man Insurance To Small Businesses