Key person planning is one of those aspects of running a small business that you don’t hear much about but is very important. Here are the basics of what it is, why it’s important and what types of businesses should consider it.
What is Key Person Planning?
Companies rely on their employees to succeed. Every company has at least one employee who serves as the bedrock for the company to function. For example, a small business with 10 employees is likely very dependent on the founder. For the sake of this article, we’ll call that person the MVP.
Key person planning, also referred to as key man insurance, is a way to protect the company from going under in case something happens to the MVP. It is a life insurance policy where the beneficiary is the company. If the MVP passes away, the insurance company will pay the company per the insurance policy.
Why is Key Person Planning Important?
Let’s pretend the business is a small restaurant. Besides the owner, all of the employees are the people preparing and serving the food – you’ve got a few cooks and servers. That’s it.
In this case, the owner is probably doing a little bit of everything.
- Marketing the restaurant, or at least managing an agency that does
- Keeping the books
- Ordering supplies (food ingredients, napkins, plastic silverware, etc.)
- Paying the bills
- Working with the landlord on issues with the building
- Preparing/serving food if someone calls out sick
Essentially, they’re doing everything required to keep the company running.
If that owner passed away, the company would fall apart. There is nobody able to quickly pick up the slack and take on these tasks without a steep learning curve.
Key person planning helps alleviate that. The payment is meant to help keep the company afloat until the business is able to get back on its feet. Maybe a new general manager is hired to do these things. Or one of the current employees steps up and fills the role. Either way, the company is saved because the insurance money helped carry the business through that rough patch.
What Companies Should Consider Key Person Planning?
While almost all companies can benefit from this type of policy, it makes more sense for some businesses than others. For example, maybe you have a partnership where both partners carry a large part of the workload. In that case, the loss of one partner could devastate the company, but having key man insurance in place may give the owner enough time to get back on their feet.
Another example is, as we discussed earlier, a small business where the owner is essentially the general manager. This is very common when a business is small. As it grows, it may get to a point that the owner becomes more of a forward-thinking leader and hires a general manager to run the day-to-day. But many businesses never reach that level.
Finally, even a big company that realizes it would be in trouble without several members of it’s C-Suite may want to consider it. Big companies can topple and fall without failsafe policies in place.
Do you have questions about implementing key person planning for your business? Give us a call at 714-663-8000 – we’d love to help.