You’ve started your business – it’s your baby, your brain-child, and you are over your head in work and responsibilities. You’re working through the various stages of your business plan, managing your finances, getting any applicable licenses and permits and ensuring your business abides by local, state, and national business regulations. You’re busy, and you’re working yourself and your new employees to the bone. But you love it, and you can’t imagine having it any other way.
This business was your dream, and now it has become your reality. You have new staff who are relying on you and the business to succeed. Your spouse and your family are also counting on you to provide. And you have to protect yourself and all of them to ensure things continue to go well in the future.
Key Man Insurance, Defined
So, you may be asking yourself, “what is key man insurance?” Key man insurance, as it is written, is insurance on the key people, maybe just one or two, in a business. These are the people absolutely critical to business continuity, and if something happened, the business would likely work its way to its demise.
As business.com indicates, the company pays the premiums and, in most cases, collects the benefits. The money generally is used for expenses until the business can find a replacement and resume regular operations, though it can be used for other means as well. The insurance plan commences once you have identified those key people that need to be insured. And, these insurance policies generally have a term of 10, 15, or 20 years depending on the type of business.
Now, of course, you are wondering how much this type of insurance will cost, and the fact is that the costs will vary widely. Each policy is really quite different and considers the age, health, and other factors about the key employee being insured.
What To Consider When Looking at Key Man Policies
It is important to take time to talk with an insurance advisor who best understands your business and your goals. The key here, no pun intended, is to have a safety net in the event something happens to you and/or the critical people to your business. We asked the experts at mykeymaninsurance.com about what kinds of questions you’ll want to consider when looking for the right policy for your business.
- Who are the vital employees to your business? These are the people that if they died, your company would quickly suffer. Typically, businesses will ensure the following professionals:
- The business owner. Death or serious injury of this person can likely impact the ability to secure financing, continue relationships with investors, or more, depending on the intellectual property brought forth by the owner.
- A key or top salesperson, especially if this person brings in a disproportionate percentage of the business income.
- Software engineer, scientist, or key intellectual property owner. Whoever developed the company’s intellectual property is definitely a key individual to cover.
- Have you thought through succession planning? Is this a family business or did you go into business with a close friend or colleague? Who are you positioning to take over the business if something happens to you?
- How much insurance do you need? As the business.com article mentioned above indicates, coverage generally ranges between $250,000 and $1 million, according to the National Federation of Independent Businesses.
What Key Man Insurance Doesn’t Cover
Your insurance agent will also inform you of this, but it is important to go in with the understanding that this type of insurance doesn’t cover the following types of situations:
- Intentional dishonesty
- Suicide (with contestability period)
There may be other exclusions as well, so be sure you do your homework.
Aside from the intellectual property that is paramount to the success of your business, often the key person at your organization is the one who has secured financing and developed relationships with investors, as mentioned previously. However, this is not a topic to take lightly. Often times, financial institutions will not extend credit or financing to your business if a relevant key man insurance policy is not in place. So, this may very well not be optional, and in that case, going into it informed is imperative. Financial institutions too want to ensure stability and longevity in your business before they will consider extending funds your way.
Ultimately, key man insurance is designed to protect you, your family, and your employees in the event the unfortunate happens. While no one wants to consider this type of tragedy, it does indeed happen, and the people who depend on you will thank you for protecting the future of your business; your baby and your brainchild.
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