A key in a lock to signify key person insuranceI recently had the pleasure of engaging in an enlightening discussion with two entrepreneurs in the process of detailing their new business model. The journey of these individuals mirrors that of the many clients whom I've had the privilege of advising. Having invested substantial effort into crafting a comprehensive business plan, constructing an operating agreement tailored to their distinctive needs, and commissioning a family member to design a sophisticated website, they had made significant progress. 

However, we arrived at a pivotal, yet frequently disregarded, aspect of entrepreneurship: insurance. Insurance, especially for key persons, serves as a fundamental element in the architecture of a business. Neglecting this can potentially undermine the fruits of laborious planning, possibly causing substantial detriment. 

To be clear, not every business needs key person insurance, it's not a legal requirement to open a business. However, as you work with members of your professional advising TEAM, make sure to discuss the insurance your business does carry and whether key person insurance should be a part of your toolbox.

What is Key Person Insurance

Key Person Insurance is a life insurance policy that a company purchases on a “key” person’s life. The company pays the insurance premiums and is the beneficiary of the policy. If the person dies, the company receives the insurance payout. The company can use the funds for a variety of purposes. It can pay expenses until a replacement person is found, pay employees, investors or debts. In extreme situations, the money can be used to wind down the company.

Does My Company Need Key Person Insurance?

There is no blanket answer for all companies. The first question to ask is which employees are irreplaceable. For most of the businesses I work with, that employee is the owner. Those owners do the hard work that keeps the business going. They handle the customers, they manage the business and they are often there at the end of the day to do the work no one else will do. For most companies, it’s a good idea to have key person insurance for these people.

How Much Insurance Do I Need?

It’s another question that is specific to each business. But I always recommend that my clients price out the different options and obtain as much insurance as they can afford.

Do I Need a Business Attorney?

You don't need a business attorney to be able to get key person insurance, but if you have more questions about the insurance or your business law needs, let's schedule a Legal Strategy Session online or by calling my Edina, Minnesota office at (612) 294-6982 or my New York City office at (646) 847-3560. My office will be happy to find a convenient time for us to have a phone call to review the best options and next steps for you and your business.

Andrew Ayers
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I work with business and estate planning clients to craft legal solutions to protect their legacies.
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