Businesses are made up of human resources. No one person can be responsible for running an entire business given that so many multiple areas require separate teams. It includes its operations, financial management, and human resource management.
However, some specific individuals are responsible for driving the business towards growth. These individuals are of core importance to a business and whose absence might entirely sink the organization.
It is why many companies have policies like Key Man Disability Insurance availed, to make sure that their company doesn’t fall into chaos if something happens to these employees. It is reflective of the importance a Key Man can have in a business.
Who Is A Key Man In An Organization?
To determine who is key to your organization is a challenging task. The Key Man/Men for each organization may vary from business to business, following their scale. You can consider the following to decide who is key to your business:
- If this person is not around, will the business be losing important skills and experience? (Especially if there is no management depth)
- If this person is not around, will the revenue stream be affected by clients of businesses withholding themselves?
- Will be in any financial liability (temporarily or in the long run) if this person dies?
- How expensive will it be finding and hiring a replacement?
Small and Medium-Sized Enterprises and A Key Man
A Key Man is especially important in an organization that is a startup or a medium-sized enterprise. Startups usually have a small number of people hired and working for them. Each person is generally overlooking an entire department’s worth of work and make do with part-time workers to maximize their operations. Small and medium-sized enterprises tend to have one or two key people whose absence for an extended period can put the business at risk. And they are highly valued within their organization.
Why Is A Key Man Essential to A Business and What May Happen In Their Absence?
Some businesses have a high dependence or rather an interdependence, which is essential to the functioning and operation of a business. For example’s sake, we need to imagine that Person X has discovered the vaccine to a lethal disease. Person X is one person who truly understands the production and usability of the vaccine. He is working on building his own company and running it himself. The organization may be right to worry about what will be the future of the vaccine in his absence or the case that he loses his life?
The vaccine production is solely relying on Person X, and this massive burden of responsibility is what makes Person X indispensable. In the situation where the company loses Person X, they might find themselves in a sticky situation. The absence of Person X can be disrupting and may cause the business to be a failure altogether. But how can an organization protect itself in the case that the Key Man is no longer around? The company, when established, is a separate entity than the ones who are responsible for making it, and thus it needs to act like one in the absence of its Key Man.
According to Forbes, many businesses are not ready to face a calamity like losing a Key Man because, in the initial years, they are busy making the business a success. The idea or possibility of something or anything going wrong crosses their head. Growth of your business seems like the priority, and people tend to keep succession plans as something in the background, seeming completely unnecessary. Moreover, the idea of death, your own, or someone that your organization relies on can be something of a difficult subject to bring up or tackle at all.
What is Key Man Insurance and Why Is It Important?
As established, since a Key Man’s skills and knowledge are indispensable for an organization, in the case something happens to them, finding a replacement may be very difficult. It is the reason why this insurance is different from life insurance. Your purpose behind getting this insurance is to safeguard your business from risk and its financial interests.
In the business world, you tend to pay the employees who work for you by determining the type of salary they will be getting. At times, it also includes the benefits package they’d receive as a part of their salary package. All this while, you are merely just quantifying their importance to the organization.
In the situation that we have identified our Key Man or Men, using the guiding question above, the only way we can monetarily value someone’s life is by insuring them.
How Can You Get It Done?
The acquisition of a Key Man Insurance can be straightforward.
- The Business will purchase the insurance – insuring the life of the Key Man. The business pays, owns, and is consequently the beneficiary of the policy.
- In the case that the employee dies, the business receives the death benefit.
- The proceeds from the death benefit can be used to find, hire, and train a replacement. It may also be utilized to cover for any potential losses that a company might incur with the passing of the Key Man/Men. The business can make use of the funds in any way they deem suitable.
There are certain circumstances where a Key Man Insurance can be attached to an additional plan that may provide a future benefit to the employee in addition to the death benefit received by the business. Proper planning and strategy can be taken up if the Key Man and organization want to opt for this. Ensuring your Key Men/Man can also be a way to retain the employees. This coverage can be significant to the employees who then tend to return the deed with your loyalty and dedicated effort to the Business.
A Key Man is the backbone of a business. Their existence pretty much runs the operation of the business entity, which is why planning for a worst-case scenario is only well advised. All the best organizations have this policy in practice. For example, Apple paid a significant amount to protect its CEO, Tim Cook. So maybe you need to reassess how you will secure your Key Man/Men in your business.