Key person insurance is needed by a wide range of companies and for many reasons but generally is most important for small and medium size businesses. These companies depend on the expertise and talents of a small number of individuals for their success. The death or disability of one of these key employees or executives may well result in the demise of the firm. Other businesses that must consider key man insurance include start-up companies, companies needing to secure financing, companies in niche markets where replacement employees may not readily be available, companies employing an exceptional sales person and companies where the business owner desires liquidity in the event of their death or disability. A few of these cases are discussed below.
- 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
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?
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.”
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? Insuring 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 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,
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,
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!