keyman coverage insurance
What is Keyman Coverage Insurance?
Keyman insurance is a specific type of insurance policy primarily for small businesses. These policies are designed to compensate the business when a key person dies or becomes disabled and can no longer fulfill their role.
A key person is generally anyone whose skills and/or knowledge contribute significantly to the business’s revenues and profitability. That may include:
- Business owners or partners
- Members of the executive leadership team
- Top salespeople
Keyman insurance is essentially a risk management tool. If a key person passes away or becomes disabled, then the policy could provide funds to continue day-to-day operations, clear outstanding debts, and/or recruit a suitable replacement.
In a keyman insurance policy, the business is typically the primary beneficiary and is responsible for paying the premiums.
Why Do You Need Keyman Coverage Insurance?
There’s no precise formula for determining how much keyman insurance is necessary to have. The final figure can depend on a number of factors, including:
- The size of the business and number of employees
- How much revenue or income the person being insured generates for the business
- How much outstanding debt the business has
- How much it could cost to hire and train a replacement for a key person
- Whether the business will continue operations should a key person pass away
If you own a family business founded by your parents, for example, then you may want to purchase a larger policy to ensure that the business can continue should one or both of them pass away. On the other hand, if you run a sole proprietorship and have no employees, then you might only need enough coverage on yourself to pay off any remaining debts owed by the business.
What Does Keyman Coverage Cover?
A primary function of keyman insurance is covering key individuals within a business organization. But it can also have other uses, including serving as collateral for a Small Business Administration loan. The SBA doesn’t offer loans directly but guarantees them for approved lenders.
As such, the SBA has a number of insurance requirements that must be met when guaranteeing loans to small-business owners. If you’re interested in an SBA 7(a) loan, for instance, then you may need to purchase a keyman life insurance policy when the loan is not fully secured by other types of collateral. This requirement is for 7(a) loans of $350,000 or more when the business is operated as a sole proprietorship, a single-member LLC, or otherwise relies on one owner’s active participation.
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