Key Employee

What is a Key Employee?

It’s the goal of any entrepreneur to build a business that can operate on its own. In order to create a fully operational business, owners usually need a good employee or two that can bring in a sufficient amount of revenue.

Once a business owner implements a system, it seems virtually impossible for the system to fail. Of course, the system can fail if an employee leaves, but business owners are usually quick to hire and replace an average person. But what if one of your employees becomes a key employee? That being, one that brings in a substantial amount of business and revenue that would be very hard to replace. Here are a few characteristics of a key employee:

  • Brings in 2-5 times more revenue than the average employee
  • Consistently earns an excellent paycheck
  • Genuinely enjoys their work
  • Vested and “bought in” to their career and the company
  • Has new ideas that are often utilized by the owner

It’s important for an owner to pay careful attention to these traits and maintain their employees. It’s even possible for a business owner to build a key employee from scratch.

What is key employee coverage?

Once a business owner knows they have a vested key employee, it’s important to cover them if the employee passes away. A business owner may have spent much time, energy, and money to build that person into a key employee.

Key employee coverage is simply a life insurance policy designed to cover an employee’s business revenue potential and funds needed to replace the employee.

Example Case Scenario:

Joan owns a local coffee shop and hires John as the store manager, and John hires two baristas. Joan cannot operate the store as she needs to focus on growth, sustainability, and possible expansion.

In an effort to earn repeat customers, Joan implements a loyalty program that would give customers free daily refills. All they need to do is purchase this year’s travel mug for a premium price of $200. Joan tries to get the employees to sell as many mugs as possible by offering a 15% commission. Employees that work 20 days a month could sell one every work day and earn an extra $600 on their paycheck.

John improves his customer service skills and sells 4 loyalty mugs every shift, earning himself an extra $2400 per month. On his own, John is pulling in $192,000 of revenue per year. Of course his commission is taken out and there is a cost for coffee and mug production, but this is a significant revenue source.

John loves his job, he is happy with his pay, and he likes that he can implement his own ideas as a store manager. As long as Joan can keep John happy, he will remain a key employee.

If John were to pass away, this would be a significant loss to business revenues. Additionally, Joan would need to stop her own production to hire and train a new manager.

Let’s say Joan wants to give herself a two year setback period if this really did happen. In this case, she would add up the revenues that John produces for two full years, then she would add up the costs of hiring and training someone new. She could even add in the cost of her own lost production. Once these factors are all considered, the final value is the amount Joan would want to have in place for Key Employee coverage.

Why work with Twin Cities Mutual Life Agency?

Our goal is to help you determine what the possible losses are when a key employee passes away. We make sure all of your bases are covered so you can feel confident in your plan! To schedule an appointment, please visit our scheduling page.