Q: What is key man insurance, and does my new business need it?

A: When you’re just starting out, you wear a lot of hats, and it seems like you spend all your time working on the urgent stuff. Spending time trying to get your product or service ready, hiring people, figuring out how to increase sales, paying the bills, etc.. Key man insurance is simply life insurance on the key person in a business. In a small business, this is usually the owner/founder or perhaps a key employee or two. These are the people who are crucial to the day-to-day business operations.

Any company can purchase a life insurance policy on the key employee. The company pays the premiums and is the beneficiary of the key man insurance policy. If that person unexpectedly dies, the company receives the insurance payoff. The reason this coverage is important is that 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 key man/woman who makes the business run. In a tragic situation, key man insurance gives the company some options other than immediate closure or bankruptcy.

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. If the company is just you and the company does not have any employees or other people who depend on it, then key man insurance is not as necessary. If you have a spouse and/or children who depend on your income, then you should have personal life insurance for that purpose.

How do you determine who needs key man insurance? 

Look at your business and think about who is irreplaceable in the short-term. In many small businesses, it is the owner/founder who is vital to the company. The key man may keep the books, manage the employees, handle the important customers, etc.. If something happens to that person, the business pretty much stops.

How much key man insurance is suitable for your business? 

That depends entirely on your business, but in general, you should get as much as the business can afford. Call Insure Bend to get a free quote on key man insurance. Be sure to ask for term insurance and ask for several quotes on different dollar amounts and compare the costs of each. Determine what your company needs to survive or replace the key man and choose a plan that fits into that budget.