In a small business, each employee usually has a more direct effect on the bottom line because a small business has fewer employees to interact with customers, create products and perform services. Small businesses typically don't have multiple people to perform key job responsibilities. The loss of a small business employee causes a greater setback to the business while a replacement employee is found.

A small business can lose a key person for a number of reasons: retirement, voluntary termination, disability, or death. If the departure is planned, as in the case of retirement or voluntary termination, the business can prepare for the loss and take steps to minimize its impact. However, if the employee becomes disabled or dies, the loss is unpredictable and leaves the business exposed to financial, business, and other risks.

Key person life and disability insurance can help a business protect itself against the financial risk associated with losing a key employee. Life insurance purchased on the life of a key person will pay the business, upon that employee's death, the proceeds of the policy. That benefit can be used to cover financial expenses and train the key person's replacement.

Key person life insurance can also provide a cash value benefit depending on the type of policy purchased. This cash value can be used for a few strategic business reasons while the employee is still living.

For example, the cash value may be withdrawn to cover unforeseen expenses or to overcome an economic downturn. Generally, it is not recommended to disturb the cash value of the policy, but it is available if absolutely needed. The cash value also provides the business with a tangible asset that can be used to show to creditors that the business is sound financially. Additionally, the cash value can help fund a deferred compensation plan.

Key-person disability insurance protects a business against potential financial loss that may occur when a key person becomes disabled. When a key person is considered totally disabled, a full benefit is paid to the business that can help recover financial losses or hire and train the key person's replacement.

There are two basic ways to determine the amount of key-person disability insurance a business needs. One measures the employee's contributions to business earnings. The second evaluates what it would cost to replace the key person including recruitment and training expenses. These figures help a business accurately estimate their financial risk and purchase the right amount of disability insurance protection.

Key-person planning can help small business owners offer attractive incentives to retain key persons, while planning for a potential business loss. A Financial Representative and Strategic Employee Benefit Specialist can help you analyze your key-person business needs and the solutions available to you.