Key Man Insurance – Why It’s Important For Your Business
What is key man insurance?
Key man insurance is primarily a life insurance on the key person to the business. If your business is small then this would normally be the owner or the founders of the company if there is more than one owner. This person is considered ‘key’ as without them the business would not be able to function, therefore they are crucial to the running of the company.
How does key man insurance work?
A company would purchase a life insurance policy on the key employee/s, they pay the premium and are the beneficiary of the policy if anything happens to the key person/s. If this person died the company would receive the insurance payoff.
Why is this important?
If the key person died in a small company then this could see the foreclosure of that company as there would be no one at hand to run it. The purpose of this insurance is to help the company survive the blow of losing the person who makes the business work. The insurance money received would allow a replacement person to be found, or if necessary allow the closure of a company in an orderly way, for example paying off any investors, severance pay to employees etc.
How much key man insurance would you need?
Generally you should get as much insurance as your business can afford. Think about how much money your business would need to survive until the key person could be replaced and for the company to get back on its feet. Address what the short term needs of your company are and how much would be needed in case of a tragedy.