Protect Against the Loss of Your Most Valuable Asset

Matt Erpelding, CLU®, ChFC Advanced Markets Team Lead | Ash Brokerage

One thing that can keep your nonprofit’s board members up at night is the thought of losing a key executive or employee to a disability or death. Often the organization’s most valuable asset is its employees. Small to medium-sized nonprofits especially depend on a small number of key people to be successful. The tragic loss of any one of them could have a devastating impact on the organization and its mission.

Losing a key person can create significant challenges for the organization to overcome. For one, there is the time and financial resources associated with finding a suitable replacement. The problem could be exacerbated by the difficulty of finding and hiring individuals with similar skills, such as a technology specialist or an engineer or a practiced, capable development officer. As well, the loss of a key person might deprive the organization of the community and service relationships that were closely connected to that individual. She or he might have worked with community leaders and local providers for many years, and the nonprofit had relied on heavily on those relationships to support its purpose and achieve its mission. The loss of a key person could also translate to a loss of revenue and focus on its mission due to the interruption in management or program development.

Zach Peterson: A Fictional Case Study

Consider the case of Derrin Williams, who serves on the board of Riparian Recovery Trust (RRT), a nonprofit, the mission of which is to protect the Chesapeake Bay by ensuring the streams and rivers in the Bay’s watershed are healthy. That watershed includes waterways in six states from New York to Virginia. Ten years ago, the board hired Zach Peterson as RRT’s chief scientist, and over the years, Zach has been instrumental in developing capabilities to identify and remediate some of the most polluted waterways.

Derrin estimates Zach’s loss would require at least $750,000 to make up for reduced revenue and fund the search for an adequate replacement. So the Trust purchases a $750,000 life insurance policy and a $750,000 key person disability policy on Zach. With the new policies in place, RRT is now protected against the negative financial consequences that would be associated with Zach’s death or disability.

Derrin and the others on the board are thrilled with Zach’s effectiveness, but they are also concerned about what might happen to RRT’s mission if Zach were to die or become disabled. Zach has developed strong relationships with key stakeholders across the watershed and is responsible for securing significant amounts of funding via grants and corporate contributions.

Key person insurance

To protect itself against the loss of a key person, organizations, including nonprofits, can purchase key person insurance. Key person insurance is a life insurance policy the organization buys for the executive or employee. If that person dies unexpectedly or becomes disabled, the key person insurance provides the funds to keep the business running until it replaces the executive or closes shop.

Typically, the process involves three main factors or steps. First, the nonprofit purchases life and/or disability insurance on the key employee or employees. As well, the nonprofit pays the premiums and is the owner and beneficiary of the policies. In the case of the insured key person’s death, the benefit is paid directly to the nonprofit; in the case of the key person’s disability, there is a waiting period prior to the benefit being paid.

Getting started

Ask yourself if your organization would experience a financial loss if a key employee died or became disabled. If so consider key person insurance. As well, revisit any previous key person insurance and disability coverage you might have in place to ensure your policies are relevant and up to date.