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Key Man Insurance
If you are a small business owner, you probably
feel you have spent too much time and money
on insurance already. However, it makes sense
to consider one additional coverage: "key
man" insurance.
Key man insurance is a life insurance policy
on the key person in a small business. Without
this coverage, the death of a key person
in a small company could put that company
out of business. Key man insurance provides
the cushion and options that can make all
the difference to the survival of the company.
The company can use the insurance proceeds
for expenses until it can find a replacement
person. Or, in a worst-case scenario, it
can help pay off debt, provide severance
to employees, and even close the business
down in an orderly manner.
The insurance is paid for by the company
(a company expense for tax purposes) even
though it pays off in the event of the death
of the key person since the company is the
beneficiary, not a person. Key man insurance
is not a replacement for personal life insurance
and should not be considered in that light.
When shopping for a key man policy, here
are some guidelines:
- identify and cover the "key man"
to your business -- the person without who
the business would be in serious trouble.
This may not be the founder but another owner,
officer, or employee.
- buy term insurance, not whole life - there
is no need to accrue any value in the policy.
- buy a policy only large enough to provide
for essential costs -- not to completely
cover all expenses or lost profits. Costs
to consider include the cost to hire a replacement,
transition costs, and (if the business would
not be able to go forward) pay off of outstanding
debts and settlement of contractual obligations.
- get quotes from more than one company or
agent.
When applying for loans or vying for business,
you may find it helpful to have key man insurance:
it lets others know that you have added financial
stablity in your small business.
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