What is Key Man Insurance?

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If you own your own business, time is one thing you seem to always be lacking.

You have a lot on your plate round-the-clock, and it seems you spend all your time working on the “urgent”–trying to get your products or service ready, training new hires and staff, making sure customers are satisfied, figuring out how to increase sales, thinking about future moves, paying bills, keeping up with the taxes, etc.

The point is, it’s hard to find the time to consider something that doesn’t fall in the “urgent” category, such as life insurance.

I know most people don’t think about life insurance for their business, but there are two types of life insurance you really should consider such as “key man” and “buy sell” life insurance.

What is Key Man Life Insurance?

First, let’s talk about key man life insurance.

Key man life insurance is simply life insurance on a key person (or persons) in a business.

This could be you the owner or, perhaps, a key employee or two. Basically, it’s insurance on those who are crucial to your business staying in business — people whose absence could seriously damage or even sink the company.

Look, I realize what we’re about to discuss is sullen.

No one likes to contemplate their death or the death of someone to whom they are close.

But if you’re reading this, then you’ve also realized this is part of the responsibility you carry as the leader.

You’re the one who has to think about the future, and you’re the one who cares enough about your family, your team members, and your customers to make sure there’s a path through even a worst-case scenario like a sudden death of someone vital to your business.


Insuring the Crucial People

Think about your business.

Who could you not afford to lose in the short-term?

Who is vital to the function and growth of your business? Obviously, you are at the top of the list, but what about your office manager, your head sales person?

How about the in-house accountant? Maybe you even have other executives who oversee entire departments?

Any or all these people, depending on what they carry for you, could be vital to staying in business.

This is where a key man life insurance policy comes into play.

How Key Man Life Insurance Works

Here’s how it works: Your company purchases a life insurance policy on the key employee (or employees) of your choice.

The insurance is usually a term policy between 10 and 30 years.

You can get other types of policies such as whole life or universal life, but term policies are usually the best bang for your buck for key man policies.

The company owns the policy, pays the premiums, and is also the beneficiary of the policy in case an employee happens to pass away unexpectedly, the company receives the death benefit.

This way your company has options other than immediately shutting down and/or claiming bankruptcy.

Different Than Personal Life Insurance

You’ll notice I didn’t mention your family — don’t confuse key man insurance with personal life insurance.

If you have a spouse and/or children who depend on your income, then you should have personal life insurance for that purpose.

But some companies that don’t offer group life insurance offer personal life insurance in the same amount, as part of their compensation package for a key employee their company insures.

Obviously, its not mandatory you do this, but it is a nice gesture that shows you care not only about your loss, but the family’s loss as well.

How Much Do I Need?

So how much key man insurance do you need?

That depends on your business.

In general, think of how much money your business would need to survive until it could replace the key person.

Get multiple quotes for varying amounts like $250,000, $500,000, $750,000 and $1 million, and compare the costs of each.

In this regard, remember more money equals more time for you to transition to new leadership.

You’re going to have plenty to deal with during this process; the last thing you want to be worried about is monthly cash flow.

Remember, if this is a vital person to your business, then you’re probably talking about several months, not weeks, to get your business back on its feet.

This includes required time to recruit, hire, and train with the aim of getting the business back on its feet.

You should also consider immediate costs you would incur such as part-time hires or outsourcing that you will need while you’re focused on employing and training.

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