Key Person Insurance: Do You Need It?
Does Your Company Need Key Person Insurance? 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.
According to David Tornetto, a financial professional in St. Louis, it all depends on your company’s structure and business continuation plan, as well as the amount of financial hardship potentially faced without a key person.
Not all businesses need key person insurance. In large companies, there may be less likelihood that a single individual or small group is indispensable to a company’s continued success. In one-person firms, however, the business will almost certainly not survive without the principal, no matter how much money is available.
Some partnerships, such as a medical practice, will most likely have a greater need for key person coverage during their early years. As the partners’ pensions, profit sharing, and net worth grow, insurance may become less necessary for the practice’s survival. For businesses primarily concerned about outstanding loans, many lenders offer and even require credit insurance. In such cases, key person insurance might be redundant.
For most small- to medium-sized businesses, however, key person insurance should be considered. To determine whether your business needs this coverage, think about what would happen if an owner or key employee were no longer a part of the business. How much would you lose in revenues, goodwill or expertise? How much would it cost to replace these lost assets?