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!
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 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 bankruptcy.
Note – Please 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.(Key Man Insurance will pay to company only)
How do you determine who needs this insurance?
- Look at your business and think about who is irreplaceable in the short term. In many businesses it is the founder or employee/s who hold/s the company together-he/they 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.
- You should ask for quotes on Rs.10cr. to Rs.100Cr. 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.
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