Key Person InsuranceComing on the heels of Twin Cities Startup Week, I've had a set of interesting consultations with new business owners about their legal issues and the next steps they need to take. For founders of new and growing businesses, one of the issues that many don't think of right away is Key Person Insurance. Depending on where your company is in its business life cycle, you may not have thought about the role insurance plays. An insurance professional is another important member of your TEAM (Trusted Experts, Authorities, and Mentors) who should be working with you to make sure your business is properly insured. If you haven't discussed Key Person Insurance with your insurance professional, now is a good time to get started.

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 companies with properly drafted operating documents, the key person insurance can also be used to repurchase the deceased employees' interest. 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. Your insurance professional should be able to give you some quotes for the various levels of insurance protection and help guide you through the process.

If Key Person Insurance is new to you and this is the first you're hearing of it, now is a good time to work with your insurance professional to get the right coverage for you and your business. 

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Next Steps

If your business could use key person insurance, contact your insurance broker (or if you don't have one, shoot me an email and I can give you a connection to one I work with) and if you want to discuss other legal issues facing your company, let's set up a Legal Strategy Session to review the best options for you and your business.

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