Why You Need Key Man Insurance If you're in business, you may ask yourself "what is key man insurance", and does my new business need it?

JUST STARTING OUT IN BUSINESS?
When you're just starting out, you've got a lot on your plate, and it seems like you spend all your time working on the urgent stuff--trying to get your product or service ready, hiring people, figuring out how to increase sales, paying the bills and so on. It's hard to find the time to consider something that isn't really urgent but that can be incredibly important, such as insurance--specifically, "key man" insurance.

Key man insurance is simply life insurance on the key person in a business. In a small business, this is usually the owner, the founders or perhaps a key employee or two. These are the people who are crucial to a business--the ones whose absence would sink the company. You need key man insurance on those people!

KEY MAN INSURANCE DEFINED:
By definition, a small business relies on a small number of key people to carry out their primary functions. When this is the case, a small business would be adversely affected in a significant fashion should a key player be lost through a sudden death or disability.

Key man cover, also called Key Person cover, pays out money to the business should an insured person die or suffer from some form of critical illness. The money can be used as it sees fit. It doesn’t necessarily have to be used to recruit and train a replacement for the insured person. It could also be used to ensure that the spouse of the deceased is financially secure.

Insurance purchased by the business: A company purchases a life insurance policy on the key employee, pays the premiums and is the beneficiary of the policy. If that person unexpectedly dies, the company receives the insurance payoff. The reason this coverage is important is because 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 person who makes the business work. 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. In a tragic situation, key man insurance gives the company some options other than immediate bankruptcy.

If the company is just you and doesn't have any employees or other people who depend on it, then key man insurance isn't as necessary. You'll notice that 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.

WHO NEEDS BUSINESS INSURANCE? How do you determine who needs this insurance? Look at your business and think about who is irreplaceable in the short term. In many small businesses it is the founder who holds the company together--he may keep the books, manage the employees, handle the key customers and so on. If that person is gone, the business pretty much stops.

How much key man insurance do you need?
That depends on your business, but in general you should get as much as you can afford. Shop around and get rates from several different agents; most life insurance agents will sell you a key man policy. Be sure to ask for term life insurance--many agents will push whole or variable life, which have much higher premiums and commissions but are unnecessary for a key man policy. Then think of how much money your business would need to survive until it could replace the key person, come up to speed and get the business back on its feet. Buy a policy that fits into your budget and will address your short-term cash needs in case of tragedy.

START NOW!
If you own a business and/or have business partners ,and don't have key man life insurance, take a few moments and talk to your insurance agent about this today! A little pre-planning could save yourself, loved ones and business partners potential headaches in the future.

This is a great article on why you need key man insurance