Death is an uncomfortable subject for many, but a necessary one to discuss. For businesses, this includes the conversation around what the business should do if a key person or employee dies unexpectedly.
If the wrong person suddenly passes away, it can cause the business to fail. If that person was leading the company or had skills, experience or a network that is not easily replaced, then the untimely passing becomes an extremely urgent matter for the company.
Here are four ways a business can prepare for the sudden death of a key person.
You can insure key people at your business in case they become incapacitated or pass away. Key person insurance is a type of life or trauma insurance policy that is owned by the business to help compensate for losses that would occur if that key person were suddenly taken away from the business.
If that happens, a key person insurance policy can inject some capital into the business to help make up for lost contracts, lost customers, keeping up the payroll, paying off debt or helping to cover the cost of recruitment, training and transitioning the company away from the person who was lost.
It doesn't have to be the CEO or the founder, either. During the early stages of my and my wife's company, we had a technical development person who lived overseas who was crucial for us. We had to have a sort of uncomfortable conversation with that person about making sure we were not left hanging if something catastrophic were to happen to them. But, they understood that it was just business.
Other types of protective measures that can be useful for companies include critical illness insurance, which can cover the cost of replacing key people who are out for extended periods due to illness or disability, and buy-sell agreements, which can provide insurance to cover the business when one of the partners dies or becomes incapacitated for a long time.
2. Figure out your key people.
Before you can insure key people, you need to know who they are. To figure that out, ask yourself if the company would be in danger if a given person suddenly stopped coming to work. While all employees are assets to a company, some important individuals might be a little more valuable when talking about the long-term health of the company.
An insurance broker or adviser may be able to walk you through a more formal process of determining who should be covered by key person insurance. Insurance aside, this is a good exercise to perform anyway, so you can ensure the continuity of your organization if something were to happen to anyone.
3. Calculate what their contribution means to the company.
To find your key people, identify those with insurable interest without whom the company would endure a significant loss. This will enable you to determine the type of insurance you need and the amount that is appropriate.
For example, term insurance that covers a specific period or permanent insurance that lasts for a lifetime is something that you may have to decide based on an individual. You'll likely need to have some conversations with your financial planners, accountants and lawyers to determine what the expected hit would be to your cash flow if a given person were to be unavailable so you can decide on the insurance required.
If it makes it easier, imagine you are starting your company again and figure out which five or 10 people you would hire the second time.
4. Start early and offer incentives.
Key person insurance is likely low on the priority list for entrepreneurs who are just starting out, but it is a good idea to do it early, as senior executives can be more difficult to insure as they age.
Some people may resist the thought of being insured or may believe they are too healthy to bother with such a thing. If you face any resistance, you can consider offering them an executive health savings plan, (a.k.a. shared ownership critical illness insurance). This type of agreement compensates the company if the employee becomes ill or dies. However, it also pays out any accumulated premiums to that employee if they stay healthy and remain at their job until a set age. This can also act as a good retention tool.
Most entrepreneurs want to focus on the future and creating success for their businesses and don't stop to think that they themselves are becoming more valuable to the company as it grows and succeeds. The best time to take precautions is before something happens.