||Carnegie Financial is looking to protect
your most valuable assets. You, the owner, partner, or spouse.
With a company owned life insurance policy, your business can
continue in your absence without depleting valuable resources. With a
separate disability policy, you can guarantee compensation for a highly
paid employee to allow his family to sustain the same lifestyle as
before the debilitating event.
Why You Need Key Man Insurance
Even if you're just starting out, it's important to protect your
business with the right insurance.
October 07, 2002
By Keith Lowe
Q: What is key man insurance, and does my new business need it?
A: When you're just starting out, you've got a lot on your
plate, and it seems like you spend all your time working on the urgent
stuff--trying to get your product or service ready, hiring people,
figuring out how to increase sales, paying the bills and so on. It's
hard to find the time to consider something that isn't really urgent but
that can be incredibly important, such as insurance--specifically, "key
Key man insurance is simply life insurance on the key person in a
business. In a small business, this is usually the owner, the founders
or perhaps a key employee or two. These are the people who are crucial
to a business--the ones whose absence would sink the company. You need
key man insurance on those people!
Here's how key man insurance works: A company purchases a life
insurance policy on the key employee, pays the premiums and is the
beneficiary of the policy. If that person unexpectedly 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 often causes the
immediate death of that company. The purpose of key man 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, if necessary, pay off debts,
distribute money to investors, pay severance to employees and close the
business down in an orderly manner. In a tragic situation, key man
insurance gives the company some options other than immediate
If the company is just you and doesn't have any employees or other
people who depend on it, then key man insurance isn't as necessary.
You'll notice that I didn't mention your family--don't confuse key man
insurance with personal life insurance. If you have a spouse and/or
children who depend on your income, then you should have personal life
insurance for that purpose.
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 is the founder who holds the company together--he may keep
the books, manage the employees, handle the key customers and so on. If
that person is gone, the business pretty much stops.
How much key man insurance do you need? That depends on your
business, but in general you should get as much as you can afford. Shop
around and get rates from several different agents; most life insurance
agents will sell you a key man policy. Be sure to ask for term
insurance--many agents will push whole or variable life, which have much
higher premiums and commissions but are unnecessary for a key man
policy. Ask for quotes on $100,000, $250,000, $500,000, $750,000 and $1
million and compare the costs of each. Then think of how much money your
business would need to survive until it could replace the key person,
come up to speed and get the business back on its feet. Buy a policy
that fits into your budget and will address your short-term cash needs
in case of tragedy.
Let me share an example from my own personal experience. My
brother-in-law started a golf vacation business in the winter of 1997.
Tommy worked many long hours for almost three years, and it looked like
all his hard work was paying off. Then one night he was killed in a car
wreck. He was 35 years old. As my wife and I tried to deal with the
magnitude of that loss, we also had Tucker Golf's employees, vendors and
customers to think of. No one planned for this to happen. But it did
happen, and we had to pick up the pieces. Tommy did not have key man
insurance, and the company struggled for almost two years before it
recently got back on solid footing. While key man insurance wouldn't
have brought Tommy back, it would have taken a major worry away from his
grieving family and employees.
Most people, particularly when they're young, don't plan on dying
suddenly. If you are working to start or grow a small business, you've
got plenty on your mind, and chances are you haven't thought much about
key man insurance. But take it from my experience: By the time you need
it, it is too late to do anything about it. Call an insurance agent
today, figure out how much key man insurance your company needs and buy