Key Man or Key Person Insurance helps to keep your business afloat in the event of the death of a key colleague. If such a tradgey could lead to your company's demise, then you should consider key man insurance. Key man insurance is basically life (or disability) insurance on specific individuals in your company that play a major role in your company's survival.
Key Man Insurance is a life or disability policy taken and paid for by the company. The company is the beneficiary. In the event of a death or disability to a mentioned key employee, the company then has the funds to make appropriate business changes to stay in business. It can cover debts, payments to investors or day-to-day expenses for the business.
Three Main Reasons to Have Key Man Insurance:
- The business cannot continue in the event of a loss of particular individuals
Consider how much knowledge your key individuals have. Are you in the services industry? Key partners such as attorneys or physicians, if gone, would surely affect your business performance. How fast can key employees be replaced? Consider the revenue impact of these individuals being gone, and insure for that coverage to get you back on track.
- Business continuity is a concern
If there is not business continuation plan in place, who will take over the business? If it is a family business, is the spouse willing and able to resume the role? Perhaps they simply want to be bought out and not have anything to do with the busness moving forward. The insurance could take care of the partner buy/sell issues when a tragedy occurs. More on business continuation planning.
- Future growth or financing needs
Banks or financing institutions may require key man insurance coverage to be in place before extending any financing or credit to the company. This ensures the stability and longevity of the business plan and therefore reduces the risk for the lending institution.
Keep in mind that younger vs more seasoned key individuals will have different coverage needs. Younger key employees are more likely to be disabled verses dying. Consider disability in addition to life insurance for younger key employees.
Key man or key person insurance coverage is usually accomplished with a term life product for 10, 15 or 20 years depending on how many more productive years the key employees have in the businesses.