Isn't That Rich Podcast

In the world of business, certain individuals are simply irreplaceable. Whether it's the mastermind behind strategic growth, the top-performing salesperson, or the beloved chef whose name brings customers through the door, losing a key player can create major financial setbacks. Enter Key Person Insurance, a safety net that ensures your business can weather the storm if a crucial team member is suddenly gone.

What is Key Person Insurance?

Key Person Insurance (also known as Key Man Insurance) is a type of life insurance policy that a business takes out on a vital employee or owner. If that individual passes away or becomes unable to work due to a disability, the business receives a payout to cover lost revenue, recruitment costs, or other financial burdens that arise from their absence.

Ryan Hallam from Pekin Insurance sat down with Isn’t That Rich hosts Ashley McVicker and Jared Gravatt to break it all down. He’s been in the insurance world for over 13 years and has seen firsthand how crucial this type of coverage can be.

Who Needs Key Person Insurance?

Ryan explains that businesses of all sizes and industries can benefit from Key Person Insurance. It’s not just for owners—it’s for anyone who is critical to the operation’s success.

"Think about it," Ryan says. "If you run an auto repair shop, your ASC-certified technician is probably crucial. If you own a design firm, your lead graphic designer might be irreplaceable. Even banks carry key person insurance on executives."

It’s also a great tool for employee retention. Ryan shares that businesses sometimes use these policies as ‘golden handcuffs,’ rewarding employees who stick around by gifting them the policy’s cash value upon retirement.

Real-Life Examples: When Key Person Insurance Saves the Day

Ryan shared a real-life scenario where a trucking company’s lead driver tragically passed away in an accident. Because they had Key Person Insurance, the business received financial support to help hire and train a replacement while covering lost income. Without it, they might not have survived the sudden loss.

He also highlighted other industries where this insurance is invaluable:

• Restaurants: Losing a head chef can mean losing your restaurant’s identity.

• Golf Courses: The head groundskeeper’s expertise is often irreplaceable.

• Financial Firms: A top financial advisor may bring in the majority of a firm’s revenue.

Does Key Person Insurance Cover More Than Just Death?

While life insurance is a key component, Key Person Insurance can also provide coverage in the event of disability, critical illness, or long-term incapacity.

• Disability Coverage: Some policies include disability riders that provide a payout if the key employee is unable to work due to an injury or illness. This ensures the business can sustain operations while finding a replacement or restructuring responsibilities.

• Critical Illness Coverage: Certain policies allow businesses to receive a payout if the insured employee is diagnosed with a severe illness, such as cancer or a heart attack. This helps cover revenue losses and additional costs incurred while the employee is unable to work.

• Cash Value Options: Some policies accumulate a cash value over time, which can be accessed by the business for various financial needs, such as hiring bonuses, training new employees, or providing incentives for employee retention.

However, Key Person Insurance does not cover voluntary resignation. If an employee simply quits, the business won’t receive a payout. That said, some policies build cash value over time, which can be used for recruitment bonuses or as an incentive to attract top talent.

How Do You Determine Coverage Amounts?

There are a few ways to calculate how much coverage your business should have:

1. Income Replacement Method – Multiply the key person’s salary by seven (a common industry rule of thumb).

2. Replacement Cost Method – Factor in the costs of recruitment, training, and lost revenue.

3. Future Revenue Method – Consider how much money that person was expected to bring into the business over the next several years.

Pekin Insurance offers consultations to help business owners determine the right coverage amount based on their specific needs.

A Smart Move for Business Succession Planning

Beyond its immediate benefits, Key Person Insurance can also play a role in succession planning. If a business owner wants to transition the company to a trusted employee, the policy’s cash value can help fund the purchase, ensuring a smoother handover.

The Bottom Line

If your business has someone whose absence would create a significant financial strain, you need Key Person Insurance. It’s a simple yet powerful way to protect your company’s future.

As Ryan puts it, “Every business has a key employee. In today’s job market, retention is huge. This is an easy, affordable way to provide peace of mind and financial stability.”

Ready to explore your options? Talk to your insurance provider to find the best policy for your business. And as always, stay tuned for more expert financial insights from the Isn’t That Rich podcast!