Key Man Insurance Definition
Key Man Insurance
If you or any other individual are so
critical to the operation of your business that it cannot
continue in the event of your illness or death, you should
consider key man life insurance. This type of policy is frequently required by banks or government loan programs. Key Man Life Insurance also can be used to provide continuity in operations during a period of ownership transition caused by the death or incapacitation of an owner or other "key" employee.
Key man life insurance is a type of insurance which few medium and small companies have in place, while many large companies have key man life insurance in place but only for directors, for example the real key players in the company have not been identified.
Key Man Insurance:
A company purchases a life insurance policy on the key employee, pays the premiums and is the beneficiary of the policy. If that person 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 can cause the death of that company. The purpose of key man life 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 pay off debts, distribute money to investors, pay severance to employees and close the business down in an uninterrupted manner. Key Man life insurance gives the company some options other than immediate failure.
Key Man life insurance provides immediate cash to help a business survive the loss. Key person insurance policies can be purchased for a specific period of time, typically for 10, 15, 20 or 30 year periods, or for life.
Key Person insurance policies purchased for life often have cash values that can be used to supplement retirement programs for key employees or to reimburse the company for the cost of this protection following a key person’s retirement.
Key Man Insurance and Venture Capitalists
Venture capitalists, banks and most other lenders often require key executive insurance for the startup companies they fund. If a death occurs, the key man insurance payment typically goes to the start up company or sometimes it goes directly to the lenders. This allows the investors and creditors to protect their investment.
Even if you are not being asked to buy key man insurance by your investors, it can make sense in some cases. Think about what would happen if you or one of your business partners passed away. If the situation would be dire, it may make sense to insure against it. If it would have effect on the business, there's no need to buy key person insurance.
Key Man Insurance