It's often said that the real value of a business lies in its staff, and with a small Springfield company, that can be particularly true. Key person insurance (also known as key man insurance) is a form of small business insurance designed to cover the financial effects resulting from the death of a key employee.

The Purpose of Key Person Insurance in Addition to Small Business Insurance for Your Springfield Company

Any time a staff member dies, you face costs such as the time to recruit a replacement and the costs of any temporary staffing in the meantime. With a small Springfield business, the costs can be particularly high because some people are difficult to replace. It takes time to recruit and train up a suitable replacement, possibly causing revenue losses or other financial effects.

Key Person vs. Small Business Insurance?

In simple terms, key person insurance is a form of life insurance where a company pays the premiums and then receives a payout if the key person dies. Oftentimes, the insurance payout is restricted to the person dying before a set retirement age. Unlike some forms of insurance, the policy doesn't payout for quantifiable losses that result from the insured event, but rather pays out a fixed amount agreed upon in advance. The person's age and health combine with the cover amount to determine the premiums. Some policies also cover serious illness or disability.

When a Key Person Leaves

In the vast majority of cases, key person insurance only pays out on death or critical illness -- not if the covered person leaves your business to work elsewhere. Usually, you can simply stop paying premiums and cancel the policy upon termination of employment, but occasionally there are lump-sum costs (a surrender fee) to do so.

You may have the option to transfer the coverage to another worker (for example, the person's replacement), though the premiums may change.

You may also be able to sell the policy to a third party, a move known as a life settlement which means the third party takes over paying the premiums and gets any payout after the person's death. You'll need the covered person's permission to do this. For a Springfield business, this is usually legal, though the third party must be licensed by the state of Massachusetts.

Do You Need Key Person Insurance?

For a sole proprietorship with no other employees, key person insurance doesn't always make sense (though personal life insurance to protect your family is another issue). For other Springfield companies, key person could be a particularly valuable form of small business insurance. If your company has a key person who would be difficult to replace, consider adding key person insurance to your small business insurance to help protect your financial future.