How to Tell If Your Business Needs Key Person Insurance

Of all the events that may threaten the future of your business, the loss of a key executive or employee can be the most financially devastating. The death or disability of this key person may disastrously affect the profitability and even survival of your business. A key man policy is a type of insurance that is written to protect against this eventuality. It provides the capital necessary to ensure that your business will survive and thrive despite the untimely loss of a key person. Here’s how to determine whether or not your business needs key man insurance:

Instructions

Difficulty: Moderate

1. Consider whether your business has a key executive or employee who is critical to the continued operation and profitability of your business
   The coverage provided by key person insurance is designed to protect against the loss of profits resulting from the loss of a key person. It enables your business to enabling it to meet its financial obligations while maintaining an uninterrupted cashflow.
2. Consider the cost in time and money that would result if you had to replace the knowledge and expertise of a key person in your business.
   Key person insurance offsets the cost of recruiting and training a replacement. It will also cover the cost of hiring temporary staff in the interim period.
3. Consider whether the death of a key person would jeopardize the interests of your firm’s partners and shareholders. This leaves the surviving partners with the choice of buying the key person's shares, or going into business with the party to whom the shares are sold. It may even result in the dissolution of the business at great loss to all involved. The proceeds from a key man insurance policy can be used by the surviving shareholders to buy the keyperson’s shares from his estate.
4. Consider whether your firm’s credit rating and outstanding loans will be adversely affected by this loss. Very often, lenders will require a personal guarantee in order to issue a loan to a small or new business. If a key person dies, the lender may very well call in the loan. If the business loan is guaranteed against the key person’s home, his heirs may stand to lose the property. A key man policy may be structured to pay off the any outstanding business loans.

Tips & Warnings

• The business is the beneficiary of the key man policy, and thus owns it. It is also responsible for paying the premiums.

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