As a business owner, it’s easy to get caught up in urgent, day-to-day tasks, which causes you to overlook certain things. And for many business owners, life insurance is one of the easiest things to overlook.
Life insurance may not seem critical, but it can be one of the biggest gifts you can leave to your partners and employees. This article will review a type of life insurance called Key Man insurance, and why it’s important for your business.
What is Key Man Insurance?
Key Man insurance is a life insurance policy you take out on a person who plays a vital role in the business. This person is usually the owner or founder, but it could also be an employee whose role is critical in running the business. Without this person’s active involvement, the business would likely go under.
To get started, the company will determine who this individual is and take out a life insurance policy on them. The business will pay the premiums and will act as the beneficiary of the policy.
In the event that your business experiences the sudden loss of an employee or other key person, the company would receive the life insurance payment. The insurance proceeds help the company absorb the financial blow while management figures out their next steps.
Key person life insurance can be used to pay down debt, hire a replacement employee, repay investors, or pay employees. If necessary, it can also be used to close the business in an efficient and timely manner.
However, the insurance coverage won’t apply to the deceased individual’s family. Keyman insurance isn’t a personal life insurance policy; instead, the company purchases a life insurance policy that will benefit the business entity itself.
In addition, most investors require this insurance as well since they want to protect their investment. But beyond that, Key Man insurance may not be necessary, depending on the type of business you run.
For instance, if you run a solo consultancy business and don’t have any employees, Key Man life insurance may not be necessary. Your family may depend on the income, but that’s what a personal life insurance policy is for.
So, how do you know if Key Man life insurance is something that you should pursue to protect your company? Ask yourself the following questions:
- Would the loss of a key employee affect the company’s brand or reputation?
- Does one individual bring in the majority of the company’s business and revenue?
- Are daily tasks and projects tied to one specific individual? Would these tasks be hard to complete without that person?
If you answered, “yes” to any of those questions, then your business should probably consider purchasing Key Man insurance.