The Importance of Key Person Insurance for a Startup

Business Insurance

If you are the founder of a startup, chances are that you and your co-founders live and breathe the business, and without you, the enterprise would not exist. That is why key person insurance is essential for your startup.

What Is Key Person Insurance?

Think of it as life insurance for your company. While a regular life insurance policy is designed to compensate the spouse and children of the insured in the event of a fatal or debilitating injury, key person insurance compensates the company when the insured is a key executive or employee. The company pays the premiums on a key person insurance policy, which may be expanded to cover other disabilities, in addition to death or incapacitation.

Why You Need Key Person Insurance for Your Startup

To begin with, many startups need key person insurance as investors require it in the term sheet. Investors want to hedge their bets, and founders of a startup are a crucial component in the success of an investment.

Regardless of what investors require, key person insurance is a critical asset for your startup. The sudden loss of a founder or co-founder could leave your company in a difficult situation, from which it may not easily recover. Compensation from a key person insurance policy could help pull the company through the rough period after a key person is lost and provide the funds needed during the period of recruiting, hiring, and training a replacement.
If the company decides to close after the loss of a key person or founder, key person insurance benefits can help pay off debts and investors and provide severance for employees. It gives the company options other than bankruptcy in a tragic situation.

Taking out key person insurance on the team members who make your startup run can have several advantages for your company:

  • It can help replace the loss of a co-founder or key person.
  • It can be used as an asset to improve your company’s creditworthiness.
  • The cash value of the policy may be available as a withdrawal or loan.
  • It can be used to close the company after the loss of a key person.

Key Person Insurance Premiums

The premium your company pays for key person insurance will depend largely on how much insurance coverage you want, and how many co-founders or key persons you choose to insure. The amount of insurance should be based on the key person’s value to the company and on what the business can afford, without taking a toll on other areas. A value of a key person to the company can be calculated several different ways, including the cost of replacement or the percentage of overall income the key person contributes to the business.

The premium for each key person will based on an insurance agent’s appraisal of that person, taking into consideration factors such as age, current health, health history, and salary. Our agent at The Gandelman Agency in Lawrenceville, New Jersey can help ensure that you have the right amount of key person insurance for your startup.