Money Matters: Key Person Insurance
What is Key Person Insurance?
A couple weeks ago, we talked about the challenges of running a business and one of them is to protecting your key people. And it's more impact on a small company. Key person insurance is basically, your key person might have intellectual property. They might be very valuable in the fact that they are bringing in clients, they have relationships. The bottom line is, if you loose one of your key people because of death or disability, it's going to put a big damper on your company and so what it going to cost me to hire someone that is comparable. Whats the training cost? All these costs go in it so generally what corporations will do, big and small. You insure your key people in case something happens to them. Like for example, you have a life insurance policy on your key person, he unfortunately passes away, money goes into the company. It give them the money to maybe finish projects that are already going and have the ability to go replace that key person.
It's got to be kind of a challenge to figure out the value of a person or their intellectual property or what it is they do.
There's multiple formulas and multiple ways to do that and sometimes insurance companies they will let you insure. They will want you to quantify. What's the value of this person and quantify it. So there is a formula base and then often times the insurance company will let you insure up to about 10 times what they were making.