Guide to Key Man Insurance Essentials

Make sure you need key person insurance

The risk associated with a key employee is sometimes entirely a matter of their having borrowed big bucks with a personal guarantee. Although credit insurance is usually unnecessary and expensive, if you already have it, key man insurance may be redundant.

I recommend: The U.S. Federal Trade Commission has a good explanation of the definitions and risks of credit insurance.

Find and compare policies and costs on the Web

Get a quick overview of your likely costs through online quote services.

I recommend: Look to Insure.com, Quickquote.com and Insweb.com. Ameritas sells insurance with no commission and is worthwhile for spot comparisons.

Calculate carefully the full impact of your potential losses

Normal life insurance coverage is usually bought at a multiple of personal income. But you won't have the luxury of investing and drawing interest if creditors are barking for payment and revenue is falling fast. Consider not only the person's contribution but the cost of finding their replacement and any contractual payouts due their survivors, like continued or deferred pay, as well as potential lost business.

I recommend: If you don't have an accountant or already track the value of your business, this online calculator can give you a quick view of the risk you are insuring. Bplans.com also has several good online calculators, including one for cash flow. Although for personal term life, Accuquote has a good needs calculator that will print a chart, too.

Consider how the loss of a key employee affects ownership

One of the often overlooked impacts of a death in the business is the question of ownership. Always get eventualities put into writing for all of the owners. Key man insurance can help finance the buyout you might want to effect if someone with a big chunk of the business passes on.

I recommend: Get a grip on the basics of buy/sell agreements at the legal site Nolo.com.