Key Man Insurance

When your company is considering financing or raising investment capital to increase cash flow and manage expansion operations, you will need to provide proof of key man insurance. Key man insurance is often one of the most important requirements to secure financing for operations, and many financiers and investors will ask for it when you apply for the loan. Not only is it a critical element of your loan application process, but it also protects your company in the event that one of your key employees dies unexpectedly.

What Is Key Man Insurance?

Key man insurance is also known as key employee or key person insurance, and is a life insurance policy used to protect a business in the event that you or an employee dies. The reason why investors and financiers require it is because they need some level of security that they are investing in a stable and profitable company for the long-term. Ultimately, key man insurance serves as a buffer for your company, ensuring that the your company will have the money it needs to survive in the event some of your key players – your key men – are no longer a part of it.

Applying for Key Man Insurance

When you apply for key man insurance to secure a loan, you are creating a collateral assignment that is essentially a lien against the policy that guarantees that proceeds are first payable to the lender in the event the key person or business owner passes away. The balance of the policy will be given to the beneficiary written in the policy, which is usually the business. Once you have been approved for key man insurance, you can add it to any loan applications when working with financiers and investors.

Do I Need Key Man Insurance?

If you are a small business owner, you may be a strong candidate for obtaining and taking advantage of a key man insurance policy. In the event that a key employee unexpectedly dies, and you can use the proceeds to find a replacement, pay off debts, pay severance to employees if you need to shut down business, and even to distribute funds to investors. Ultimately, having key man insurance gives you options other than filing for bankruptcy. And, you will fulfill one of the most important criteria when applying for financing or raising investment capital for your company.

Top Benefits of Key Man Insurance

There are a number of reasons to invest in key man insurance, regardless of the size of your company:

1. Key man insurance is easy to acquire and does not require any IRS disclosures or special filing procedures.

2. The proceeds are generally tax free.

3. You have the option to use insurance to fund executive compensation plans.

4. You can choose which employees to insure. You can buy key man insurance for just a single employee, or several employees based on your needs and budget.

5. Key man insurance provides peace of mind for business owners, investors and creditors.

Ways to Use Key Man Insurance

Key man insurance is one of the most flexible insurance policies available and makes it easy to fund all types of expenses as you stabilize your company. You can use the proceeds of key man insurance for:

·         Recruiting and training costs for a new employee to replace the deceased employee’s position

·         Improving your company’s credit standing

·         Executive compensation planning

·         Securing a loan for business expansion purposes

·         Paying outstanding bills and expenses

·         Paying off debts

·         Purchasing stock from the deceased owner’s estate

·         Creating a salary arrangement for a surviving spouse