Everything changed within a moment — that’s where key person insurance comes in. It’s profit protection for a law firm. It’s life and disability insurance that goes hand in hand with the firm’s business continuity and succession plan to help the firm survive a major financial loss if it were to suddenly lose key employees. It protects the firm (rather than the individual) from a catastrophe that may fall upon a certain individual.
The recent, tragic death of United HealthCare’s Chief Executive Officer (CEO) has reignited discussions about the vital importance of key person insurance in safeguarding law firm stability and leadership continuity.
Many firms do not have any form of key person insurance coverage, despite it being a great form of profit protection. They often do not appreciate the need or are even aware it exists.
This article will explain how to identify key individuals at your firm, what key person insurance is, what it covers, and how and why your firm may want to consider purchasing it.
WHAT IS KEY PERSON INSURANCE?
Key person insurance is a life insurance policy that a law firm takes out on essential personnel. It’s a specialized use of life or disability insurance that transfers the risk of losing a key person at the firm to the insurance company. The law firm becomes both the owner and the beneficiary of the key person policy, which is meant to protect the financial interest of the law firm if the firm loses a key employee to either sickness, disability or death.
It covers a variety of losses. including:
- Shareholder interest losses incurred by a disabled, sick or deceased partner.
- Losses incurred if the firm is unable to grow or loses money from a time sensitive case or client.
- The cost of hiring temporary personnel and then recruiting, training and hiring a permanent replacement.
Because key person insurance is a life and disability insurance policy, the law firm is not covered if a key person at the firm simply transfers laterally to another firm, retires or departs. If, however, a key person at the firm becomes ill, physically unable to do their job or dies, the law firm would be able to collect on the policy as tits beneficiary.
The amount the firm would be able to collect would depend on the limits purchased, the person’s overall salary and contribution to the business and how long it may take to replace the key person.
WHO ARE THE KEY INDIVIDUALS AT YOUR LAW FIRM?
When considering a key person policy, the first step is to identify who those key individuals are. It’s anyone at your law firm that substantially contributes to the bottom line — anyone who may be integral to the firm’s current and future success. That may be a firm shareholder, partner, owner or employee whose skills and expertise are extremely valued. In other words, if something were to happen to this person — such as financial injury, falling sick or dying — the firm would suffer considerable financial loss.
Many firms do not have any form of key person insurance coverage, despite it being a great form of profit protection. They often do not appreciate the need or are even unaware it exists.
So when looking to identify these individuals at your firm, look at the rainmakers or top earners at your firm, or partners with exclusive ties to key clients or who are firm leaders with irreplaceable knowledge. In other words, those employees who might be difficult or expensive to replace or are highly skilled with unique training.
MAKING IT PART OF YOUR FIRM’S BUSINESS CONTINUITY AND SUCCESSION PLAN
The payout and waiting period in the event of a claim is determined by how you set up your policy. Similarly, the costs of key person insurance may depend on the age and health of the individuals on the plan as well as the length of time you wish to cover them for (typically through retirement age).
The sudden loss of the United HealthCare CEO serves as a stark reminder of the unpredictable nature of life and the potential impact on a company’s leadership. Key person insurance is essential for businesses to mitigate financial risks associated with the untimely departure of crucial executives. This type of insurance not only provides a financial safety net to help offset the loss of revenue and resources during a critical transition period, but it also reassures stakeholders and investors about the company’s stability.
An investment in key person insurance allows organizations to safeguard their future, ensuring they are better equipped to navigate the uncertainties that come with sudden leadership changes.
