The importance of Key man Insurance in small businesses
Key man insurance is life insurance on the key person in a business. In a small business, this is usually the owner, the founders or perhaps an employee, such as Sales Director or Portfolio Manager, who is responsible for much of the firm’s revenue.
The people who you need key man insurance are the people who are crucial to a business-the ones whose absence would be the downfall of the company.
Statistics from Society of Human Resource Management indicate the cost to recruit and train a new Chief Executive is typically 250% of their annual salary.
So, to replace the owner of a small business with an annual salary of US$290,300 would cost the company US$725,750.
A company purchases a life insurance policy on the key employee, pays the premium and is the beneficiary of the policy. If that person dies, the company receives the pay off.
The reason this coverage is important, is because the death of a key man in a small company can often cause the immediate closure of the company. The purpose is to help the company survive the blow of losing the person who makes the business work.
The company could use the insurance proceeds for expenses until a replacement person is found or if necessary the proceeds could pay off debts, distribute money to investors, pay severance pay to employees and close the business down in an orderly manner.
- Make sure you get term insurance- whole or variable life plans have higher premiums and commissions but are not necessary for a key man policy.
- Think about how much money your business would need to survive, to replace a key man.
- Think about how much premium you could afford to pay.