Many Canadian small businesses rely heavily on one person. This is a person who is instrumental to the success of the business and would be difficult to replace, at least for the short-term.
Examples of key people are managers, directors, and in some cases IT people that are responsible for maintaining and running legacy systems.
What would happen to a small business if this key person were to pass away, or be incapacitated by a debilitating illness? This depends on how critical the person is to the business. In some extreme cases it can mean lost revenue to the point where the continued existence of the company is in jeopardy!
To safe guard against this sort of thing happening companies can purchase “key person insurance”.
Safeguarding Against Sudden Death of Key Person
A life insurance policy can be used to protect a business from the death of a person key to their business.
Term life insurance plans are commonly used for this purpose, since they are cheaper than a whole life plan and building up a cash value is not the point of the exercise. The length of the term varies: usually they are longer terms (e.g. Term to 20, or Term to 100) since critical employees tend to have very low turn-over rates (at least they should, for the sake of the company!)
The employer would be the owner as well as the sole beneficiary of the policy. Unfortunately, due to Canadian tax laws the premiums are not tax deductible. However, if there is a benefit paid out then the death benefits would not be taxable.
Benefits could then be used to train a replacement, as well as compensating for any loss in company income.
Safeguarding Against Debilitating Illness/Accident of Key Person
A life insurance policy will protect you from the death of a key person, but it will not help if the key person is disabled due to permanent injury or illness.
The solution in this case is Canadian disability insurance. Benefits are paid out on a monthly basis, and similar to a life policy, can be used to train a new replacement and also cover lost income.
It is important to know that companies that want this type of protection often take out a life insurance and disability insurance policy on the key person, thereby covering all their bases.
Important: some may argue that critical illness insurance can be used to as a form of protection against illness. However, a critical illness plan only pays out if the insured person gets a disease that is listed as covered. If a key person is debilitated by something not on that list than there are no benefits paid out by the carrier. In addition, critical illness does not cover disability due to an accident. For these reasons, we recommend a disability insurance policy instead.
Insuring key people is something that small to medium sized companies should consider. Of course, this depends on just how important (and replaceable) your employees are!