Key Man Insurance Can be Good for Small Businesses and Owners
Key man insurance is often purchased in small companies or family owned businesses to protect a sudden death or disability of the business owner or key person in the company. In the event of death or disability, the company receives benefits from the insurance company based on how much insurance was purchased.
This may not be worth considering for many companies in this day and age. Many top executives often leave for other companies several times throughout their career, leaving the company to pay expensive premiums on a policy. The company can lose the money on their investment if they decide to drop the coverage.
“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’s the owner who holds the company together; he may keep the books, manage the employees, interact with key customers and so on. If that person is gone, the business pretty much stops,” (Key Person Insurance Definition: Entrepreneur, February 9, 2014).
“Low-cost term insurance is preferable because it does not build up cash value,” says Frank N. Darras, American’s top disability insurance lawyer. “Find a policy that allows you to transfer the insurance from one person to another in the event the key person leaves and a replacement is found. That way, your company hasn’t lost out on all those premium payments and only has to change the name on the policy.”
The company may also consider selling the key man insurance policy to another business: “Rather than lose the money you have put into the policy, another option you might explore is something called a life settlement. Basically, this involves selling the policy to a third-party business for some fraction of its value. That business holds the policy, continues making premium payments on it, and collects the benefit once the insured person dies.” (Making ‘Key Man’ Insurance Pay When a Key Man Leaves: BusinessWeek, October 31, 2013).
Currently, life settlements are growing in popularity, yet the governance of selling life insurance policies varies state-by-state.
“I recommend small businesses look into key man insurance as a resource for their company. If you own a small business, don’t undervalue your position. I encourage you to shop around for a key man insurance policy that will provide you or your company with the right amount of insurance benefits to find a replacement for you in case you leave the company unexpectedly. There are many experts out there who can help you create a policy to keep your business around for many years to come,” says Darras.