If you own or operate a small business, then it’s likely that most of your time is committed to the daily operations of that business. While you may have plans in place for future ownership (such as immediate family, heirs or business partners), you may not have given much thought to what happens if those plans are suddenly interrupted. That’s where key man insurance (or key woman, key person or business life insurance) comes into play.
Key man insurance is a life insurance policy on one or several employees of a business which is paid for by the business. This makes the business the owner of the policy which will provide it with a cash payment in the event of the death of the key employee.
Key man insurance is unnecessary for most business employees, but there are a few scenarios where it can be particularly valuable.
4 Times Your Business Should Have Key Man Insurance
The business is reliant on one or more critical performers – If the business is entirely or mostly dependent on one or more individuals then key man insurance may afford the business the ability to transition in the event of their loss. For instance, if the name or reputation of a business owner is a big driver for the business, key man insurance might be a worthwhile investment. The same could be true if a specific salesperson is responsible for the bulk of the sales due to established relationships, or if a particular employee has specialized knowledge that’s not easily replaceable.
In other words, if there are certain employees whose loss would end the business and not just hamper it, then you may want to consider a policy.
The business is structured as a partnership – If the business is structured as a partnership, key man insurance can be useful even if the loss of a partner would not otherwise hamper the business. Key man insurance could provide the remaining partners with the opportunity to buy out the deceased partner’s stake in the business. This ensures the business can immediately make a cash payment to the deceased partner’s surviving family and allows the business to avoid most ownership disputes.
You’re considering a sale or transfer – If you’re exploring the possibility of a sale or transfer of the business, key man insurance helps make assurances to the buying party because they can be confident that the loss of a critical employee won’t devalue the business. Essentially, it offers the buyers the same critical performer benefits mentioned above.
You’re looking to finance the business – If you’re working with a lender to secure business financing, a key man insurance policy can potentially be used to collateralize a loan. Just as with a sale or transfer, these policies can increase lender confidence that the loss of an important party won’t prevent the business from repaying a loan. This isn’t necessary with all business financing, but it is relevant if the business is heavily reliant on the same factors mentioned above.
If you’re looking for key man insurance, most major insurers offer some version, so your current insurance provider is a good place to start. If you don’t have a strong relationship with an insurer, your best bet is to shop around for rates and policy limits just as you would with any other form of life insurance. When you’re considering policy limits, you’ll need to keep in mind the purpose of the loan.
A policy intended to get the business back on track, rather than replace value for a buyer or lender, will likely demand lower coverage and thus command less premiums.
Have you considered business life insurance for your small business?