When you are just starting out with a business, it feels as though you’ve got a lot on your plate and it might seem like you spend the majority of your time working on urgent projects like hiring people, figuring out how to increase sales in the interim, paying bills or getting your service or product ready. It’s hard to find the time to consider issues that are not really considered urgent but can actually be quite important such as insurance.
One of the types of insurance you should consider as a business owner is key man insurance. Key man insurance simply refers to a life insurance policy that protects a key individual in the company. In a smaller business this is typically the owner, a key employee or the founders of the company. Key man insurance refers to staff members who are essential to the success of the business, meaning that if they were to be lost it would be financially disastrous for the company.
Having keyman insurance on these people allows you to have some peace of mind about the ability to spend your time and energy recruiting or training new individuals to replace a key person after he or she has unexpectedly passed away.
How KeyMan Insurance Works
In this scenario the company will purchase the life insurance policy on the key employee, make the premium payments and serve as the beneficiary on the policy. If the individual dies unexpectedly, the company is the one who receives the benefits from the payoff of the insurance. This caveat is so essential because the death of a key individual in a smaller business can cause significant disruptions and even jeopardize that company’s existence. The purpose of key man insurance is to provide some financial comfort to absorb the blow of losing an individual who makes the business successful.
The company can use these insurance proceeds for their expenses until they can find a replacement person or to pay severance to employees and close the business, distribute money to investors or pay off debts in the event that they decide to terminate a business existing at all. In a sad and unexpected situation, key person insurance gives a company options other than immediate bankruptcy.
Knowing the potential cost of losing a key person will determine how much coverage you should get. If speed is of the essence, you can apply for a no exam life insurance policy, with the catch of coverage being capped at $250,000 to $400,000 per policy. If you need coverage well in to the millions, you should opt for a traditional policy.
What If My Company Isn’t that Big?
If the company is just you and there are no other employees or other people who depend on its existence, then keyman insurance might not be necessary. Bear in mind, though, that you should still have your own form of personal life insurance. If you have a spouse or children who are dependent on your income, it’s definitely essential to have personal life insurance for those purposes.
In order to determine who needs your insurance, evaluate your business and determine what employees are considered irreplaceable, whose loss would represent a significant threat to existence of the company? Determining the right amount of key man coverage depends on your business but in general, you should obtain as much protection as you can afford.
Make sure to shop around and get rates from various agents since most life insurance agents can sell you a keyman policy. Make sure that you understand which type of policy you are buying. Term life insurance is certainly the most affordable and popular as it comes to key man insurance. Term life insurance provides coverage for a set period of time during which the business will pay the premiums and then receive the benefits from the policy if the individual passes away. It is important to speak with your employees about the fact that their key man insurance policy does not take the place of a personal life insurance policy and that if they wish to have protection for their own family members, they should obtain a personal policy in addition to what you provide.
Getting advice from an industry professional can point you in the right direction as it relates to keyman insurance. Having someone to answer your questions can definitely make it easier when you are confused about when keyman insurance is beneficial or how to choose it most appropriately. Finding an independent life insurance broker can go a long way towards addressing your concerns. Do not hesitate to get help from someone who knows the landscape and can tell you more about what you should know before you purchase a keyman insurance police. Solid advice is always a good bet when you’re looking at insurance policies.