Just as life insurance can protect a family from financial distress if the head of a household dies unexpectedly, key-person insurance can help a small business survive the untimely death of its owner or a crucial employee.
In fact, key-person insurance is life insurance. The only difference is that instead of providing benefits to the deceased's family, the policy provides money to the deceased's place of business. What the business does with those death benefits depends on the circumstances.
Can Your Business Live Without You?
If you work strictly for yourself, the question of key-person insurance is moot. When you die, so does your business. (You should have a conventional life insurance policy to protect your family, however.) But if you have one or more employees, you ought to consider how your sudden death would impact them.
If your business is so intimately tied to you that continuing it after your death would be impractical, key-person insurance would provide the funds for severance packages for your employees as well as any costs related to dissolving the business.
What About Your Key Employees?
You might not be the only person who is vital to the company's survival. Do you rely on any executives, employees, salespeople or software engineers whose expertise, contacts or "secret sauce" would be difficult to replace? If so, you ought to consider key-person insurance on those individuals as well. They would need to sign an Employer Owned Life Insurance Acknowledgement and Consent form. A typical policy would pay up to 10 times the employee's annual salary, plus benefits.
Key-man insurance policies will not only reassure any investors that you might have, but also enhance your company's creditworthiness in the event you need to borrow money.
Besides having a succession plan and key-person insurance, you should also have a lawyer create a power of attorney document in case you become incapacitated for any reason. The document should clearly specify the person you want to act on your behalf.
In the End, All Planning Is Financial Planning
If you own a small business, you have a responsibility not just to yourself and your family, but also to your employees, vendors and customers. That's why it's so important to enlist the help of outsourced legal and financial professionals when formatting contingency plans for the rest of your life — and beyond.