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Key man life insurance is, to put it simply, life insurance that’s placed on a key person by a business. It protects the business from financial loss in case of the death of the key person.
The main difference between a traditional life insurance policy and a key man life insurance policy is that in a key man insurance policy the business is the owner, payer, and beneficiary of the plan.
Do You Need Key Man Life Insurance?
When you start a small business or are self-employed, you are the key man—even if you’re a woman.
You may have investors such as family and friends who would be financially affected if you were to die before they saw a return on their investment.
That’s because when you start a small business, you wear all of the hats. You’re the:
- Vice President
In short, for anything your business requires, you are the person in charge. And if you die without key man life insurance, it all goes away. Your business would not be able to pay off any vendors you might owe money to. Your heirs would have to choose between trying to keep your business going without you or closing it out, hopefully without incurring additional debt.
That’s why, generally speaking, if you run a small business, you should have key man insurance.
An Extra Layer of Protection for Your Employees
Hiring your first employee is scary, exciting, confusing, and fun all at the same time.
You are now in the process of expanding your business. At the same time, you’re taking on financial responsibility for others. It’s a great feeling to hire someone and watch them grow along with your business.
However, if you should pass away without a key man life insurance policy, you would put your employees in the position of becoming unemployed without warning. Not only will they need to deal with your death, but they will also have to deal with losing their job and facing financial hardship.
If you get a key person insurance policy, however, it would cover payroll and a severance package for any employees you might leave behind.
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How Much Does It Cost?
Getting quotes for key man life insurance is as simple as getting quotes for personal insurance. What’s more, you won’t see a difference in rates between a key man policy instead of a personal policy.
For example, on average, a 40-year-old healthy male can get $1 million in coverage for 20 years at around $58 per month. Therefore, it’s surprising that only about 22% of businesses have key man insurance.
One of the main reasons people shy away from any life insurance policy is that they overestimate the cost of it. However, once they have gotten a quote, their outlook completely changes.
How Much Do You Need?
Each business is different when it comes to determining how much key man life insurance you need. Generally, experts recommend purchasing about 20 times their annual income for a life insurance policy. For a key man life insurance policy, however, you should purchase a policy that’s worth at least twice what your business is worth on paper.
Determine how long it would take your business to survive until your heirs could find a replacement for you. Also include factors such as covering 12 months of payroll or 1 year of rent if you have an office space.
Once you have calculated how much coverage you need, shop around to find the most affordable rates.
How to Take Action
The easiest way to get started is to get a few term life insurance quotes without giving away any of your personal information. Therefore, your first approach should be to go through this part of the process online.
That’s because you need to get an idea of the costs for the coverage you need. Then, once you have a general idea, you can reach out to an agent to assist you.
Throughout your search, keep in mind that you are the beating heart of your business until it’s strong enough to function on its own. During this fragile stage of your business, a key man life insurance policy is protection you need for your business.