A growing business requires a resilient and robust staff. A smart entrepreneur is someone who prepares for the worst and isn’t afraid to confront the worst-case scenario.
Building a business isn’t just about leaving your legacy; it’s about keeping a sustainable entity that provides work to your staff and reliable services to your customers.
If your business heavily relies on a few executives to operate, you have a contigency plan in place. One of the most common strategies that business owners utilize in this scenario is call Key Person or Key Man insurance. Below is an overview of how a Key Man policy works, and why your business should consider it.
A sense of security
Life insurance is commonly used to protect families and businesses from the unexpected loss of a primary earner. Having Key Man life insurance in place for your business’s most valuable executives or partners will allow your company to continue operating while you find and train someone to replace their responsibilies.
The length (or term) of a Key Man life insurance policy should depend on how long the business expects the employee or executive to continue working for them. Most businesses purchase a 10-year term, but if your business is a start-up or if your key employees are also owners, you should consider a longer term.
Who should get the insurance?
If you are your own boss and are the only employee of your business, you probably don’t need to worry about having Key Man insurance. But if your business would likely fail without the help of your business partners, then you should probably consider coverage not only to protect your partners, but also to protect yourself.
When purchasing key man insurance, you need to determine who is vital to your business. Most of the time, these employees are executives or business partners that have a unique understanding of the business. Key employees could also be anyone that has a strong relationship with the business’s clients, such as a top salesperson.
How much coverage do you need?
Life insurance companies typically limit the amount of coverage you can purchase on an employee to 10 times their earned income before taxes, but a few companies may be able to offer more depending on your situation. Term life insurance is the best option for key man insurance because it’s the easiest to understand and it offers the lowest rates.
To calculate the amount of coverage you need for each employee, determine how many years it would take to find and train a suitable replacement for his or her position. You can also consider how much money your business could potentially lose during the interim. A good starting point would be to get some quotes for $100,000, $250,000, $500,000, and $1 million of coverage to determine your budget.