Strategic Safeguarding with Key Employee Protection
The Backbone of a Business: A Key Employee’s Value
As an owner of a thriving construction company, John* attributes a lot of his success to a single employee who played an integral role in his company for over 15 years. Sheila* is indispensable — she not only orchestrates the company’s operations, but nurtures vital relationships with clients, vendors, and suppliers. If something were to happen to Sheila, John’s company would plunge into disarray, with huge disruptions to ongoing projects, lost professional relationships, and irreplaceable operational expertise. In fact, the financial repercussions of such an event could range between $200,000 to $300,000.
Nobody wants anything to happen to Sheila, but the risk of financial havoc remains. What are John’s options?
Option A:
Nothing
Do nothing and hope for the best. So if nothing happens to Sheila, great! No cost to him. However, if Sheila suddenly becomes incapacitated or even passes away, John’s company could face a financial burden of $200,000 to $300,000 (hiring a replacement, losing important business contacts, etc.). This is on top of whatever challenges the company would face during the transition period.
Option B:
Key-Person Insurance
Set up a key-person insurance policy through Whole Life Insurance. This would only cost John what he paid for the policy. For example, if he paid $2000 towards the policy and something unexpected happened to Sheila, the policy would cover the cost of the immediate financial impact.
Build a Safety Net with Key Person Insurance
In our client’s case, John’s key person was Sheila — John’s company sought active protection and purchased a key person insurance policy for her. So, if Sheila unexpectedly passes away or becomes incapacitated, John’s company will receive a benefit of around $300,000 to cover expenses associated with her loss (like hiring and training replacements, managing project disruptions, and maintaining critical business relationships).
Key Person Insurance vs. Whole Life Insurance
Key person insurance is a type of Whole Life Insurance. While Whole Life Insurance typically provides financial security for individuals and their families upon death, key person insurance serves a different purpose — it is specifically designed to protect businesses against the financial impact of losing a critical team member. This unique aspect makes key person insurance an essential strategy for business owners to protect their company’s legacy, mitigate risks, and ensure financial stability in unforeseen circumstances.
* Case study is based on real clients. Names have been changed for privacy.
