Key person insurance actually meets the needs of a large variety of companies, but it is most crucial for small and medium size businesses. This is because the success of this size company hinges solely on the skills and experience of a select handful of individuals. Should one of these key employees or executives experience death or disability, the company may very well meet its' demise. Other businesses that need key man insurance are start-up companies, companies that need to secure financing, companies in niche markets where employee replacements are not readily available, companies with one exceptional sales person, and companies in which the owner requests liquidity in the event of their death or disability. The following offers more details on these types of business.

Key person insurance for start-up companies

Of course all companies are based on key employees, but a start-up company relies exclusively on the talents of a small number of people. Business executives, salespeople and others with unique background experience offer instant credibility to a newly founded company. Whether it's their ability to raise capital, their established relationships with suppliers and vendors, their outstanding sales records from previous positions, or their superior technical expertise...these key people are the foundation of a great start-up business.

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The death or disability of any one of these key employees will undoubtedly lead to financial hardship or even the downfall of the company. Key man life and disability insurance on these key people is necessary to protect the company from such disaster. The costs to secure key man insurance are nominal in contrast to the financial loss suffered by the demise of a company.

How key man insurance can help secure financing

Companies usually depend on financing or investment capital for the cash flow needed to grow to the next level, whether it be through the expansion of operations or through research and development. Key man insurance is often a basic requirement of lenders as well as investors to secure such funds. One of the nation's top lenders to small businesses, the SBA, requires key man insurance in most cases, prior to presenting funds. When key person insurance is not a requirement to secure a loan, the added credibility offered by such insurance is highly valuable when facing financiers and investors. In fact, one of the first questions of banks and lending institutions is often whether your company has key man life insurance.

To ensure that the lender receives funds to cover the loan balance due in the event the key person or business owner dies or is disabled, a collateral assignment is common procedure when key man insurance is used to secure the loan. This is actually a lien against the policy that ensures that proceeds are primarily paid to the "assignee", or lender. The balance of policy proceeds are then given to the beneficiary of the policy. A collateral assignment gives the lender the total loan balance amount due, and gives the business the remaining insurance proceeds. For important information regarding this topic, please refer to our article on common errors made when purchasing key man insurance.

Key man insurance for niche businesses

Niche businesses have a critical need for key man insurance, more than any other type of business. Research and bio-medical firms, hedge funds, companies with special contracts, and others with patents and proprietary systems- the success of each one of these types of companies depends on the highly specialized expertise of key employees or owners. Should one of these individuals become disabled or die suddenly, the business would surely face a great downfall or its' ultimate demise. A business that is in such a "niche" category, must insure key employees and business owners in order to experience long-term success.

Why small business owners need key person insurance

Small business owners need the ability to put funds into the company to sufficiently replace the expertise of one or more key owners. They may also need to have cash available to "buy-out" a deceased or disabled partner or shareholder's family. They must be able to provide funds to effectively transition when an owner retires from the company.

Often, businesses will have "buy sell agreements" that detail the sequence of events in the case of death or disability of a business owner or shareholder. Key man insurance is typically the most efficient and cost effective means of funding agreements such as this. More on this can be found in the article "What is a buy sell agreement?"

Business succession planning is highly important for small businesses, and key person insurance plays a vital role in this process. Much of a business owner's personal assets may be tied up in the business itself. This is when key man insurance using cash value life insurance can step in and provide the liquidity needed to successfully transition a company's ownership without taking a toll on its earnings ability and cash flow. More on this topic can be found in the articles "Business succession planning" and "Why Buy Key Person Insurance"

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