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Key Man Insurance

If you are a small business owner, you probably feel you have spent too much time and money on insurance already. However, it makes sense to consider one additional coverage: "key man" insurance.

Key man insurance is a life insurance policy on the key person in a small business. Without this coverage, the death of a key person in a small company could put that company out of business. Key man insurance provides the cushion and options that can make all the difference to the survival of the company. The company can use the insurance proceeds for expenses until it can find a replacement person. Or, in a worst-case scenario, it can help pay off debt, provide severance to employees, and even close the business down in an orderly manner.

The insurance is paid for by the company (a company expense for tax purposes) even though it pays off in the event of the death of the key person since the company is the beneficiary, not a person. Key man insurance is not a replacement for personal life insurance and should not be considered in that light.

When shopping for a key man policy, here are some guidelines:

  • identify and cover the "key man" to your business -- the person without who the business would be in serious trouble. This may not be the founder but another owner, officer, or employee.
  • buy term insurance, not whole life - there is no need to accrue any value in the policy.
  • buy a policy only large enough to provide for essential costs -- not to completely cover all expenses or lost profits. Costs to consider include the cost to hire a replacement, transition costs, and (if the business would not be able to go forward) pay off of outstanding debts and settlement of contractual obligations.
  • get quotes from more than one company or agent.

When applying for loans or vying for business, you may find it helpful to have key man insurance: it lets others know that you have added financial stablity in your small business.

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