When should you buy key man insurance

The right time for a company to buy key person insurance can vary depending on the specific circumstances of the business. Often a start up company or a business starting a new venture will look at insuring its key people. But it really does vary from one company to another and there isn’t really a set time.


Here are some factors to consider when determining when to buy key person insurance:


  1. Identifying Key Individuals: The first step is to identify who the key individuals are in your company. These are typically individuals whose skills, knowledge, experience, or relationships are critical to the operation and profitability of the business. This could be a founder, CEO, top salesperson, or key technical expert.

  2. Business Size and Stage: The size and stage of your business can influence when you should consider purchasing key person insurance. Start-up companies might opt for key person insurance to safeguard their business’s financial stability in the event of a critical individual’s untimely death or disability. In the early stages, many start-ups heavily rely on a few key founders or essential employees whose expertise, relationships, or vision are vital to the company’s growth and success. Key person insurance provides a financial safety net by offering a source of funds that can be used to cover immediate expenses, hire replacements, or manage potential disruptions, thereby ensuring the start-up’s continuity and protecting against severe financial setbacks during a vulnerable phase of growth

  3. Financial Impact: Consider the financial impact of losing a key person. If their absence would significantly disrupt operations, lead to the loss of key clients, or impact revenue, it may be time to consider key person insurance.

  4. Financial Readiness: Assess your company’s financial readiness to pay for the premiums associated with key person insurance. The cost of premiums will depend on factors such as the key person’s age, health, and coverage amount. Ensure that your business can afford the premiums without straining its finances.

  5. When taking out a loan: Key person insurance for a loan or business loan protection serves as a risk management tool for both lenders and borrowers. Lenders may require it to mitigate the risk associated with a key individual’s potential disability or death, ensuring repayment of the loan in case of such an event. This insurance also offers business continuity by providing funds to navigate disruptions caused by the absence of a key person. For borrowers, it can offer reassurance that the loan can still be repaid in adverse circumstances, safeguard valuable business assets used as collateral, and meet lender requirements. Ultimately, key person insurance for a loan helps protect the interests of all parties involved in the lending transaction.
  6. Risk Assessment: Evaluate the risks associated with your key individuals. If they have health issues or engage in high-risk activities, the need for key person insurance may be more immediate.

  7. Future Planning: Key person insurance can also play a role in long-term succession planning. If you are grooming a successor for a key role, having insurance in place can provide financial support during the transition.

  8. Legal and Regulatory Requirements: Some industries or regulatory bodies may require key person insurance as part of compliance or licensing requirements. Be aware of any legal obligations that apply to your business.

Ultimately, there is no one-size-fits-all answer to when a company should buy key person insurance. It’s essential to carefully assess your business’s unique circumstances, risk factors, and financial situation to determine the right time to purchase this type of insurance. Consulting with an insurance professional or financial advisor can also help you make an informed decision based on your specific needs and objectives.