The Cost of Not Having Key Person Insurance
What Would Happen if a Key Employee Was Suddenly Gone?
Every business has key people; owners, executives, top salespeople, or specialists whose knowledge, relationships, or expertise are essential to operations. If one of these individuals were to pass away unexpectedly or become unable to work, how would the business survive?
Key person insurance protects companies from the financial fallout of losing a critical team member. Without it, businesses risk lost revenue, disrupted operations, difficulty securing loans, and even potential closure.
In this article, we’ll explore what key person insurance is, why it’s crucial, and what the financial consequences of not having it could be.
What Is Key Person Insurance?
Key person insurance is a life and disability insurance policy taken out by a business on an essential employee. The business is both the policyholder and the beneficiary, meaning that if the insured key person dies or becomes disabled, the company receives a payout to help cover financial losses.
A key person can be:
• A business owner or founder whose leadership is critical.
• A top salesperson or executive responsible for driving revenue.
• A technical expert whose skills are hard to replace.
• A financial officer who manages critical business accounts and relationships.
The payout from a key person insurance policy can be used to:
• Offset lost revenue.
• Hire and train a replacement.
• Pay off business debts or investors.
• Stabilize operations while the company regroups.
Without this financial cushion, businesses face serious risks when a key person is suddenly gone.
What Happens if You Don’t Have Key Person Insurance?
Not having key person insurance can result in:
1. Loss of Revenue
If a key employee is responsible for generating significant revenue such as a lead salesperson or company founder their absence can immediately impact cash flow. Clients may leave, deals may fall through, and income may drop overnight.
2. Operational Disruption
Losing a critical team member means lost knowledge, broken processes, and time-consuming efforts to train a replacement. Many small and mid-sized businesses struggle to recover from such an event.
3. Difficulty Obtaining Loans or Investment
Lenders and investors often consider key person insurance a requirement when providing funding. Without it, a business may struggle to secure capital, making expansion or recovery even harder.
4. Loss of Confidence from Clients & Employees
If a founder or executive suddenly disappears without a succession plan, it can shake client and employee confidence. Morale may drop, and clients may question the business’s long-term stability.
5. Potential Business Closure
In worst-case scenarios, the sudden loss of a key person can force a business to shut down due to financial instability, lack of leadership, or an inability to adapt.
How Much Does Key Person Insurance Cost?
Key person insurance costs depend on factors such as:
• The individual’s role in the company.
• Their salary and financial contribution to revenue.
• The amount of coverage needed.
• Age and health of the insured person.
Businesses can typically expect to pay annual premiums ranging from $500 to $5,000 per year per key person, depending on coverage limits and the insured’s health status.
Compared to the potential financial loss of losing a key employee, the cost of key person insurance is a small price to pay for stability and peace of mind.
How to Determine if Your Business Needs Key Person Insurance
Ask yourself these questions:
• If this person were gone tomorrow, would the business suffer financially?
• Would revenue drop significantly without them?
• Is this person essential to securing loans, investments, or key contracts?
• Would replacing their skills and experience be difficult or take months to resolve?
If the answer is yes to any of these, your business should strongly consider key person insurance.
How Sentinels Financial Group Can Help
Key person insurance isn’t just about protecting a company’s bottom line, it’s about ensuring long-term business stability. At Sentinels Financial Group, we help businesses:
• Assess their key person risk and coverage needs.
• Find the most cost-effective insurance policies.
• Ensure financial security in the event of an unexpected loss.
Without the right protection, businesses are exposed to unnecessary risks that can threaten their future.
Schedule a consultation today to discuss key person insurance and safeguard your company’s success.
Whether you're exploring options for your small business, your family or yourself, we’re here to make it simple.
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