 Key
person insurance and start-up companies
Securing
financing with key man insurance
Niche
businesses need key man insurance
Small
business owners and key person insurance
Key person insurance and start-up
companies
All companies have key employees but the
start-up company more than any other relies on the abilities
and skills
of a select number of people. Based on their past achievements
these business executives, salespeople and scientists,
etc., bring and instant credibility to a newly founded
company. These individuals may possess special abilities
to raise capital, have established key relationships
with suppliers and vendors, hold a technical expertise
that
is very rare or own an extraordinary track record of
past sales. Whatever the specific case, a start-up
company’s
most valuable asset is likely its key employee(s).
In
a start-up company, the death or disability of a key employee
will result in significant financial hardship
and in many
cases business failure. Therefore, having key man life
and disability insurance on your key people is critical
to protect
your company from a potential catastrophic loss. The
costs to secure key man insurance are negligible when compared
to the economic loss caused by the demise of a company.
Why take a chance?
Securing financing with key man insurance
To get to the next
level, most companies rely on financing or investment
capital for the cash flow needed to fund expanded
operations or research and development. A chief requirement
of lenders as well as investors to secure these funds is
key man insurance. In fact, the SBA, one of the country’s
largest lenders to small businesses, requires keyman insurance,
in most cases, prior to funding any loan. Even if keyman
insurance is not a requirement to secure financing, the
cost of key person insurance is negligible compared to
the added
credibility your company will have with your financiers
and investors. When attempting to secure financing, do
not be
surprised if one of the lender’s first questions
is, “Does
your company have key man life insurance”?
Generally,
when using key man insurance to secure a loan, a collateral
assignment is utilized to ensure that the
bank or lending institution receives funds to cover the
loan balance
due in the event the key person or business owner dies
or is disabled. A collateral assignment in effect is
a lien
against the policy that guarantees that proceeds are
first payable to the “assignee”, in this case
the lender, with the balance of policy proceeds going to
the
named beneficiary
of the policy. With a collateral assignment,
in
the event of the death or disability of a key employee,
the lender gets the exact loan balance amount due with
the business
receiving the remaining insurance proceeds. For a sample
collateral assignment document see, “Sample
Collateral Assignment.”
Important: See “Common
Mistakes When Buying Key Man Insurance.”
Niche businesses need key man insurance
More than any other type of company, key man insurance is
crucial to niche businesses. For example, hedge funds, research
and bio-medical firms, companies with special contracts and
other businesses with patents and proprietary systems all
rely heavily on the niche expertise of key employees or business
owners. What happens to the company if one of these niche
people becomes disabled or dies unexpectedly? Iinsuring these
key people is imperative to the continued success of these
businesses. If your business falls into
this “niche” category, you need key man insurance.
Small business owners and key person insurance
Small business owners have several needs for keyman insurance
including: to provide income to the business to replace the
skills and experience one of the key owners, to have the
available liquidity to “buy-out” a deceased or
disabled partner or shareholder’s family, or to provide
funds for the successful transition of the company when an
owner retires.
Typically businesses have prearranged agreements called “buy
sell agreements” that include the instructions for
what to do in the event of the death or disability of a shareholder
or business owner. In nearly all cases, key person insurance
is the most efficient and cost effective means to fund these
agreements. For more detailed information see, “What
is a buy sell agreement?”
Free Instant Buy-Sell Insurance Quote
Key man insurance is also an extremely valuable tool for
business succession planning. In most cases, a large percentage
of a business owner's assets are tied up in the business
itself. In these cases, key man insurance using cash value
life insurance can provide the liquidity needed to successfully
transition the ownership of the company without a dramatic
effect on its earnings ability and cash flow. For more information
see, “What is
business succession planning?”
Also see "Why
Buy Key Person Insurance"
Questions?
Call MEG Financial today at (877) 583-3955 and a licensed
insurance professional will assist you and provide
you with detailed information and answers to all of your
key man insurance questions. We can also provide custom
quotes right over the phone. Call Now!
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