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Protect your business with key man coverage

Date posted:  11/5/14 07:15:00 AM Key man coverage can help a business endure the loss of a crucial employee.

If you've created a successful business that is the financial lifeblood for your family, chances are you will do anything to keep that venture running according to plan. But like many of life's unforeseen problems, obstacles are bound to arise, bringing forth a potential pitfall for you and your company.

That's why it's important to protect your business wherever necessary, and that protection includes key man insurance coverage.

Key man coverage is a life insurance policy taken out by a company to protect the loss of a key person or persons in a business. God forbid a high-ranking CEO, manager or top-flight employee passes away or becomes disabled. Such an event could easily sink a small business. Key man coverage is there to help your company survive the grave bombshell of losing an essential member of your team.

"Key man coverage helps a company survive after losing a vital employee."

The company can then use the insurance proceeds toward expenses until it locates a replacement. It can also use the proceeds to distribute money to investors, pay severance to employees or pay off debts, according to Entrepreneur Magazine. If worst comes to worst, the insurance money can also help the company shut down in a methodical fashion.

Don't make it two tragic situations
The National Association of Insurance Commissioners reported 71 percent of small-business owners and managers claimed their company's success was largely dependent on one or two essential people. Despite this lofty claim, only 22 percent of respondents stated they possessed a key man coverage plan.

Losing a vital member to a team is as tragic as gets, but taking out a key man coverage policy can help keep businesses from going through a second gut-wrenching sequence in the immediate aftermath: bankruptcy.

How much key man coverage is necessary?
According to the Insurance Information Institute, there's no specific blueprint to determine the financial losses a business might experience after a key employee dies.

However, a business should try to assign a figure as a benchmark for how much insurance coverage they need to purchase. The institute recommended looking at the responsibilities of the key employee or employees and seeing how their loss would affect the business. If they are responsible for a set amount of sales, the loss is the profit obtained by those sales.

In other cases, a valuation can be placed by estimating the cost it would take to replace a key member of the company, including employment agency fees and moving expenses for the replacement.