You wouldn’t drive without car insurance, and you wouldn’t run your business without business insurance. You don’t expect to get into an accident, but you like to know that you’re protected, no matter what happens.
It’s the same with your business. You put a lot of time and energy into making your business a success. You like the peace of mind that comes with having business insurance.
You’ve got most of the basic small business insurance you need, but have you thought about key person insurance?
What is Key Person Insurance?
Key person insurance, also known as key employee insurance, helps protect your small business in case the owner or other key employee dies.
Very often, a small business depends on one or two key people to keep the business afloat. These are the people who manage the books, know all the customers, and make sure there’s always coffee in the jar. If they were to disappear from work one day, the business could fall apart without them. In that situation, key employee insurance would pay out.
How does Key Man Insurance Work?
A key man insurance policy is like a life insurance policy. The difference is that the beneficiary is your business, not your loved ones, and not any single person working at your business.
You can buy a keyman insurance policy for the owner of the business, and for any other key employees. Your business can be the owner of the policy and pay the premiums, or you can pay them and own the policy yourself.
Either way, if something happens to the person insured, the business gets the insurance payout. The business can use key person insurance payments for anything they like to keep the business going.
Who Needs Key Person Insurance?
If you’re running a small business with a few employees, then you probably need key employee insurance. Usually, you’ll take out a key man insurance policy for the owner, and maybe one or two other vital employees.
Ask yourself what would happen if any employee stopped coming to work? If the answer is “A disaster,” then you need key employee insurance for that person.
If your business takes a loan from a bank, the bank might insist that you take out a key person insurance policy.
If you personally guarantee business debts or loans, and then you die, your family could have to pay the debt or loan out of your personal funds. But key employee insurance would pay them off instead, helping your family at a difficult time.
Are There Eligibility Requirements for Key Employee Insurance?
If you want to get a keyman insurance policy, you have to meet these eligibility requirements:
- Your business is making a profit
- You have proof that the person you want to insure plays a vital role in the business
- The person insured holds less than 51% of the shares in the company, and the key person and their family together hold less than 70% of the shares, if relevant
Usually, sole proprietorships without employees, and one-person LLCs don’t need key man insurance. In this case, the business dies with the owner.
What Happens if the Key Person Quits the Business?
The main drawback to key man insurance is what happens if the person who’s insured quits the company. There are 3 common possibilities:
- The business has to accept the loss of the money spent on premiums, and surrender the policy.
- Sometimes you can sell your key person policy to the key person’s new employer.
- Occasionally, you can arrange a life settlement, which means that you sell the policy to a third party. It’s not as much as you’ve paid out in premiums over the years, but at least it’s more than if you surrendered the policy.
What is the Purpose of Key Person Insurance?
You’re probably wondering why you might need a keyman insurance policy? It’s there to make sure that your business doesn’t go under without you. If you’re the owner, you’re probably the one who keeps everything together. You know the password for the internet router, the most valuable clients, and how to file your income tax return.
If anything were to happen to you, the rest of your employees might struggle to continue your business. If your family depends on the income from your business, or you dream of a business that lives on after you, you want to do all you can to keep it going without you.
With the payout from your key person insurance policy, your business could:
- Pay for a temporary worker to do some of your tasks
- Stop working for a week or two while someone else learns how to do your job
- Pay off business debts and severance pay so that the business can be closed down calmly instead of going into bankruptcy
How Much Does Key Person Insurance Cost?
Like every type of business insurance, key man insurance rates depend on many things:
- The age, health, and gender of the person insured
- The size of your business
- The type of business you run
- Whether you buy term key person insurance or a permanent keyman insurance policy (a term policy costs less, and it’s usually all that a small business needs)
- How much you want the policy to pay out if the insured key person dies
What Other Insurance Policies does a Small Business Need?
Key employee insurance is important, but it’s not the only insurance policy that a small business needs. Other important business insurance policies include:
- General liability insurance, for if someone is injured, or their property is damaged, by your work or on your premises
- Professional liability insurance, in case a client complains about the quality of your work or the advice you gave
- Product liability insurance, in case you sell a product which damages property or injures someone
- Workers’ compensation, in case one of your employees is injured through their work
- Equipment insurance, in case your expensive machinery or equipment is damaged or stolen
Key person insurance brings an extra level of protection and reassurance for small businesses with employees.