Key Person Insurance for Small Businesses
A lot of the things that I write about small business continuity will come from personal experience. 2020 was an ugly year. Since December of 2019, I had been in pain, both in my back and my legs. I was struggling, but it didn’t get really bad until August. I have had back surgery before but the pain had been different. Suddenly, I could not walk. It took a couple of weeks, but I finally stumbled into an orthopedist’s office.
My tiny little, one-person business had taken some hits. In January, I separated from the one paying customer I had. I was working far too hard and had not garnered the respect I deserved. My two other customers were/are on hold.
With COVID-19, small businesses, which I prefer to focus on, started falling to the wayside. But that was not the primary problem. I could not think. I could not concentrate. My back shut my business down.
Though I have recommended ‘Key Person’ insurance to organizations large and small, I have never considered it for solopreneurs. Instead, I tried working from the bed, or dragged one leg behind me into my office to sit in pain trying to do part-time contract work that requires concentration!
It had not occurred to me. Companies purchase Key Person insurance to cover the death or disability of an employee(s) whose expertise cannot be easily replicated. For small businesses, the key person might be the owner or founder, and in some cases, the only person capable of running the business.
Your company owns the policy. Think of it as covering your high-level single points of failure (SPOF). If you can, make sure that there are no single points of failure in your organization. But you must also understand that as the CEO, you are a SPOF.
Be aware that the essential people are not always the ones that you consider to be “key”. The head of sales is important, but the sales division can keep running without him. You may find that the one salesperson who brought in 80% of your accounts in the last five years is the person that you cannot do without. If that person dies, the company may suffer a significant drop in revenue.
Let us go back to the one-person company for a moment.
Bottom line: cover yourself. Cover the people who are important to your company. In the next two articles, I will discuss how to form a strategy committee for Business Continuity with other small businesses and how to determine what your ‘Essential Business Functions’ are and how to identify your SPOFs. This will allow you to determine who needs to be covered.
Consider a couple of things before you contact an insurance company. How much insurance will you need? If the Key person has an appointed backup, the blow to the company will be smaller than the loss of a SPOF.
How long might the drop in revenue last? If you are a one-person company and become disabled, your revenue or your business may be gone. How much do you need to support yourself and/or your family? I suggest erring in the direction of overcompensating. A larger premium is better than a serious financial deficit.
A larger company must consider how many people have to be covered. The cost of the premiums is worth it when something happens to the SPOF in accounting. Most importantly, work on eliminating that SPOF! Make that a priority.
Once the SPOF(s) have been identified and prioritized, take a few moments to call around. It will not take forever. I have found that the company that carries my liability insurance will cover little ol’ me in case of sickness or other disability. Call your current insurance company first and see what they will do. Make your company resilient.