Human capital is the biggest asset any business can own, and its quality and expertise often determine its success. In some companies, a few selected employees contribute the most to the overall profitability of the business.
These are people with unique skillsets or talents and losing them would result in the business facing huge losses. To avoid finding themselves in awkward situations, some companies take out key-person insurance.
In this post, we’ll walk you through what key insurance entails, explain why you need this coverage for your business, and show you how and where to acquire it.
What makes a person “key” in a business?
A key person is someone who brings in the highest revenue to the business, or one who has a skillset that’s considered a lifeline of a business. For example, if you’re a POS business and you have a salesperson who brings in 80% of revenue, this individual would be considered your key person.
Should something unexpected happen to such and you lose them, you might be unable to pay your employees, fail to meet your overhead cost, lose your income, and ultimately your business could collapse.
Measuring the value of a key person
To get started, calculate the potential loss you will incur for 12 months should you lose a key person. Next, calculate how much it would cost to replace your key person.
If the task sounds a little too involving for you, you can use a company like Caspian Insurance who will be happy to send you a free no-obligation keyperson policy quote. Their experts will crunch the numbers for you and advise on the most suitable cover, depending on the nature of your business.
Other options besides keyperson insurance
Besides key insurance, you can create a sinking fund to cover the loss of a key person in your business. First, calculate how much revenue you would lose within 6-12 months and then calculate how much it would cost to replace.
Now start setting money aside to cover this potential loss and think of it as an emergency fund for your business in case you lose your key person(s).
For this strategy to be successful, however, you will have to be extra disciplined about saving the money. You should also hope and pray that there won’t be any eventuality before you’ve saved up enough for the sinking fund.
Another strategy you can implement to cover the loss of a key person is to use cash flow. However, it’s worth noting that the risk is higher with this option because by the time you’re losing your key person, your net income will likely have reduced. What’s more, the little income left will probably go towards mitigating the loss of the person.
The last option is to take out a bank loan when you lose a key person. And just like using cash flow, this method comes with its own risks.
If at the time the loss occurs your business is struggling financially, you may have trouble accessing loans. And even if you do, interest rates might be too high, meaning you could end up dealing with more losses than that of your key employee.
Why you should have keyperson insurance
The biggest advantage of purchasing keyperson insurance is that it eases the burden of having to raise enough money to deal with a loss all at once. You only need to make monthly premium payments and you’re set.
Besides, keyperson insurance is self-completing, and regardless of when the loss occurs, you know your business will be compensated. This is unlike sinking funds, whereby if you hadn’t built it up to its target, you will be caught flat-footed if the unexpected happens.
Another reason to secure keyperson insurance is that it can help to boost your credit standing. For example, when applying for business loans, you may be required to have this cover. If your business doesn’t have it, your loan request could be declined.
Finally, if you’re in a niche business like software development, biomedical, or any other technical businesses where “expert” knowledge is needed, key person insurance is vital. Remember, your business will be at the greatest risk should you lose your key employee.
Most businesses insure their equipment and inventory against losses but fail to take insurance against the loss of human capital. What many don’t know (or choose to ignore) is that the loss of a key person could be the beginning of the end of their businesses. Secure keyperson insurance today and sleep more soundly at night knowing your business is well safeguarded against one of the most significant risks to growth.