Keyman Insurance
Even if you're just starting out, it's important to protect your business with the right insurance. When you're just starting out in business it seems like you spend all your time working on the urgent stuff, trying to get your product or service ready, hiring people, figuring out how to increase sales, paying the bills and so on. It's hard to find the time to consider something that isn't really urgent but that can be incredibly important called "key man" insurance.
Key man insurance is simply life insurance on the key person in a business. In a small business, this is usually the owner, the founders or perhaps a key employee or two. These are the people who are crucial to a business. These individuals would sink the company if they were absent. You need key man insurance on those people!
A company can purchase life insurance policy on the key employee or employees pay the premiums and become the beneficiary of the policy. If that person unexpectedly dies, the company receives the insurance payoff. The reason this coverage is important is because the death of a key person in a small company often causes the immediate death of that company. The purpose of key man insurance is to help the company survive the blow of losing the person who makes the business work. The company can use the insurance proceeds for expenses until it can find a replacement person, or, if necessary, pay off debts, distribute money to investors, pay severance to employees and close the business down in an orderly manner. In a tragic situation, key man insurance gives the company some options other than immediate bankruptcy.
Keyman insurance is not necessary if there are no employees or other people depending on this situation. Keyman insurance is not personal life insurance, so don't confuse the two. If you have a spouse and/or children who depend on your income, then you should have personal life insurance for that purpose.
Look at your business and think about who is irreplaceable in the short term. In many small businesses it is the founder who holds the company together. He/She may keep the books, manage the employees, and handle the key customers and so on. If that person is gone, the business pretty much stops. It depends on your business on how much you need and can afford. Be sure to purchase term insurance. Agents many attempt to push whole or variable life, which have much higher premiums and commissions but are unnecessary for a key man policy. Ask for amounts around $100k to $1.5m and compare them. Then think of how much money your business would need to survive until it could replace the key person, come up to speed and get the business back on its feet. Buy a policy that fits into your budget and will address your short-term cash needs in case of tragedy.
Most people, particularly when they're young, don't plan on dying suddenly. If you are working to start or grow a small business, you've got plenty on your mind, and chances are you haven't thought much about key man insurance. But experience shows by the time you need it, it is too late to do anything about it.
Special Note: This summary outlines in general terms the coverages afforded under some policies. Examine the policy carefully for any exclusions, limitations, or any other terms or conditions that may specifically affect coverage. The terms and conditions of the policy prevail.