A new business has many demands; there are people to be hired, targets to be met and strategies to be made. While you are busy paying bills, It is easy to forget that there are important things like insurance that you should also be considering.
Choosing the right insurance for your business is very important. An easy way of keeping things simple is by protecting your business with Key Man insurance.
is a type of life insurance that covers the ‘key’ person in your business, for example you as the owner, a key employee or founder in the business. If you think about the people in your business that are vital to it’s running and then having think of then handling things without them; Key Man insurance makes that thought a lot easier to bare.
Here’s how key man insurance works:
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.
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 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.
If you are working to start or grow a small business, you’ve got plenty on your mind, and chances are you haven’t thought much about key man insurance. But take it from my experience: By the time you need it, it is too late to do anything about it. Call an insurance agent today, figure out how much key man insurance your company needs and buy it!
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