Key Man Insurance for the Entrepreneur
If you are forming an LLC with a friend, in whom you have complete trust and confidence, you are probably at the pinnacle of your life. Not many people get that opportunity to work that closely with someone who is more than just a co-worker but rather a dear friend; someone that can be trusted with the daily operations of a business and your future for that matter.
I once had a partner in a business that I literally trusted with every aspect of the business, including the banking, negotiating with potential clients, structuring new businesses (setting up an LLC) and merchant accounts. This takes a lot of trust and confidence. I often said to myself, if I ever had to step away from the business, either intentionally or unintentionally, I would be happy with him running the business. That’s a good sign.
In most cases, having 2 or more people, collaborating on issues, is helpful. That’s why partnerships are so valuable. Actually let me clarify that statement. “Partnerships are so valuable” IF you get to select your partner. What if one is given to you without your input? This is where a partner might not help or complement you enough to help you success in business. This scenario is not one that most entrepreneurs would select if they had a choice.
Hence the topic of my article: Key Man Insurance.
If my partner passes away or is disabled for any reason (or me for that matter) the laws of this country, by default, will give his/her heirs any assets that he/she had. This may include equity in a business. Now although I loved my business partner and trusted his judgment in business, I didn’t select him as a partner because I trusted his wife’s business intuition. I don’t want his wife to step in and assume his position, salary, responsibilities, etc. After all, she might not understand the first thing about my business.
Side note: in some cases, she might be more qualified than her husband and would fit well in your LLC. Consider yourself lucky because good partners are rare.
If I purchase a Key Man Insurance policy on a partner or key executive and death or disability happens, this insurance policy will pay me, as the beneficiary, to compensate for a loss that the business might suffer because of the passing of a partner or key employee.
If I plan for this event and write a clause in our operating agreement that addresses buyout provisions, I could actually purchase an insurance policy large enough to cover a buyout in this event. That way I can pay a surviving spouse or heir(s) what they rightfully deserve and I wouldn’t have to come out of pocket to do so. I also wouldn’t have to give up control on my company to a “forced partners”, which in my mind is the more important reason for buying this type of insurance.
Planning for events like this are easier to do in the beginning stages of a business.
Recommendation: When setting up and LLC or Corporation, draw up an operating agreement with all the partners and include a buyout clause. Once you’ve nailed down the details, purchase a Key Man Insurance policy to cover your situation.
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