Bruce Sackrison's Insurance Matters: Does your small business need key person insurance?
Insurance Matters

Bruce Sackrison's Insurance Matters: Does your small business need key person insurance?

Bruce Sackrison

Bruce Sackrison is a Napa Valley Register columnist who will write about property and casualty insurance matters.

If you have employees, keep reading to see if you need key person insurance.

This coverage is also known as key-man insurance. It’s not required, and often it’s not necessary. But when it is needed, it could save your business from bankruptcy.

What is key person insurance?

When we say “key person insurance” we are usually referring to a life insurance policy on a key employee. However, it can also refer to a disability policy.

In this column, I’ll talk about life insurance.

Key person insurance protects a business from financial loss in the event of the death of an employee who is critical to the economic survival of the company.

It’s probably best to explain it with a story.

“Alligator Al”

Our fictional character this week is truly unique. Alligator Al wrestled alligators for a living. And he wrestled them with flair and comedy. He performed at Reptile Heaven; a well-known tourist stop.

Even though tourists strolled through the rest of the zoo to look at all of the exotic reptiles, it was Alligator Al’s show that brought them in. He was the main attraction.

But Al liked to take big risks. One day, Al bit off more than he could chew. And the alligator responded by also taking a big bite. It was grizzly, so I’ll spare you the details. But sadly, Al died.

After an appropriate time of grieving, business owner Bob was faced with a stark reality; he had to find another alligator wrestler. And it couldn’t just be any old alligator wrestler; it had to be one as exciting as Alligator Al. It was going to take a year or longer to find Al’s replacement.

Al was a key employee, and Bob had not made plans in case of Al’s death.

Business owner Bob went out of business before he found a new alligator wrestler.

What can we learn from this?

First, don’t wrestle alligators. It’s really dangerous (and probably uninsurable, but that’s another discussion).

Second, think about your business. Pause, and take a moment right now to think about your employees. Is there one person who is almost irreplaceable? Of course, everyone can be replaced... eventually.

But what’s the time factor in replacing say, a superstar salesperson who has the hearts of long-time customers?

If she or he dies, how many customers will drift away while you take months to find the right person to replace them? What is the impact to your small business in those months?

Can you survive it?

How does key person life insurance work?

The simple explanation: the company takes out a life insurance policy on a key employee.

The company owns the policy, and pays the premiums, usually with after-tax dollars. Then, the company is the beneficiary if the employee dies.

The company has what we call “an insurable interest” in the key employee. They are protecting a valuable asset, without which, they would suffer some financial loss.

My thoughts:

You may need this coverage and not have it.

According to a survey by the National Association of Insurance Commissioners, more than 70 percent of businesses said that their success was linked to one or two key employees.

But only 22 percent had key person life insurance on those employees.

If you have employees, call your local business insurance agent, and discuss key person life insurance.

If you don’t have a trusted agent, I’m happy to answer any questions you have. Call or email me today.

Bruce Sackrison is an insurance property and casualty broker affiliated with Professional Insurance Associates. He is at 707-931-0186 or


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