Best Answer: by Jeffrey Moses
Many small businesses depend on specific individuals for the company's continuing success. Some companies, in fact, could not survive if one or more key individuals suddenly died or were injured and could not work.
To guard against financial loss due to the absence of an indispensable employee, many companies take out "Key Man" insurance, in the form of life insurance, disability insurance or both. Specific instances or situations in which a company should consider Key Man may occur when:
1. The success or ongoing existence of a partnership is dependent on the abilities of one or more of the partners.
If one of the partners suddenly passed away, or became incapacitated and could not continue work, Key Man insurance would provide a financial cushion for the remaining partners, enabling the business to continue while new talent was recruited. Experienced insurance professionals agree that between the ages of 30-65 it is much more likely that a
person will become disabled than die. For this reason, disability insurance should play a role in any Key Man insurance decisions.
2. The business needs to secure a loan.
When granting a loan to a small business, a lender will often require that one or more of the owners or employees take out life insurance and/or disability insurance protection, with the company or lender named as the beneficiary.
3. A salesperson generates a high percentage of total sales.
The insurance would cover lost sales revenue while the employee recovered from illness or accident, or in the case of death, until a new employee could be hired and trained.
4. The business merges with another company, goes public or enters any type of financial/operational arrangement with another company.
Key Man insurance is often taken out for top executives, project supervisors or marketing individuals. Tech companies often take out Key Man insurance on one or more of their indispensable engineers or designers.