Most organizations employ at least one individual who is essential to the organization’s success. In a school this person is often the Head of School (HOS), Headmaster/mistress, Principal, or other similar role. If this person unexpectedly leaves —due to a death, disability or immediate resignation—it may be hard for the school to survive. In these uncertain times, the possibility of a unexpected leave has increased immensely.
Key-person life insurance or key-person disability insurance can help protect you from chaos caused by the abrupt absence of a vital individual. These insurance solutions can provide the school with income checks to make up for financial loss or to use for temporary or permanent replacement costs. Therefore, schools should purchase separate policies for each key employee.
How Does Key-person Coverage Work?
- The school purchases life or disability insurance for key individual(s)
- The school is the beneficiary of the insurance policy and owns the policy. If the key employee dies, the policy pays out to the school
- Tax-free dollars from the policy can be put toward finding, hiring and training a replacement employee, compensation for lost business during the transition and/or financing timely business transactions
- The policy can be transferred to a departing key employee as a retirement benefit or to a different key individual upon the retirement of the original key employee
- Can be used to buy out the key employee’s shares or interest in the company
- Premiums are based on several factors, including the key employee’s age, physical conditions, health history and the amount of coverage
Key-person Disability Insurance vs. Key-person Life Insurance
When most leaders think of purchasing key-person coverage, they turn to life insurance. However, the chance of losing a key person to disability is 17 times greater than losing a key person to death, and the costs of hiring a recruiter to replace the key person and training him or her for a short period could be much higher than finding a permanent replacement.
Considerations before Purchasing Key-person Life or Disability Insurance
- Estimate the value of your key employees. Think about what would be lost without these people as well as the costs associated with replacing them.
- Determine if this coverage is necessary, as credit insurance will cover outstanding loans and debts.
- Create a continuation plan that outlines how your school will function if you lose key employees.
Requirements and Coverage Options
To obtain key-person disability or life coverage, the individual must be a consenting employee and you must demonstrate that your school would incur substantial financial loss without him or her. To qualify as a key person, most insurers require that the employee’s salary be in the top 20 percent of the company. All key-person policies are written specifically for the employee in question.
To learn about coverage options, limits and other plan details, email us at info@austin-co.com.
This Benefits Insights is not intended to be exhaustive nor should any discussion or opinions be construed as professional advice.
© 2011, 2015, 2018 Zywave, Inc. All rights reserved.
