How to Add Key Person Coverage to Your Business Plan?
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Building a successful business means planning for surprises, even the tough ones. If you have someone your company cannot do without, it is smart to protect your whole team with key person coverage.
This step-by-step guide shows founders and small business owners how to size up and write in this important coverage for investors, partners, or lenders. The good news is you can break it into clear steps without getting lost in insurance jargon.
Let’s walk through each part together, using plain English the whole way.
Why Key Person Coverage Matters
A key person is the team member who makes things work. It might be your business partner, your top salesperson, or the technical founder.
If this person is out of the picture, your business could lose money, momentum, or even its biggest clients. Lenders and investors often ask how you would handle that loss.
Key person insurance shows you have a backup plan.
Start With a Simple Risk Assessment
Before buying insurance, figure out who counts as a key person and what it would mean if they could not work anymore. Ask these questions:
- Who has skills or relationships that would be tough to replace quickly?
- What projects, client accounts, or company secrets depend on them?
- If this person left suddenly, how much money would the business lose in the next year?
Write down your answers. They’ll help you choose a coverage amount and show lenders or investors that you take risk management seriously. Engaging Business Plan Writers ensures key person coverage is integrated seamlessly into your business plan.
Calculating How Much Coverage You Need
The next step is to decide how much coverage will help your business survive if you lose that key team member.
Here are three practical ways to calculate your number:
- Multiples of Salary. Usually two to five times the person’s salary.
- Replacement Costs. Total up what it would cost to recruit, hire, and train someone new.
- Revenue Impact. Estimate what percentage of your yearly revenue would be lost if the person could not work for a year.
You can use more than one method and pick the highest number if it makes sense. Write a short paragraph in your business plan to explain your thinking.
Picking the Right Policy
There are two main types of life insurance for key person coverage: term life and permanent life.
- Term life covers a set number of years and is often a cheaper choice.
- Permanent life lasts for the person’s whole life and builds cash value, but costs more.
Not sure which one to pick? It helps to read a clear guide before you buy. You can explore coverage with Everly and check out their Life Insurance 101 resources.
Additional Policy Choices
Decide who will own the policy.
Usually, the business is both the owner and the beneficiary. This keeps things simple for investors and banks.
If a lender wants the policy as collateral, talk to your agent. You may need to file a collateral assignment form to make the bank the first one paid back if there is a claim.
How Key Person Coverage Looks in Your Business Plan
Sample language might look like this:
“The company will maintain key person life insurance on the CEO for an amount equal to four times annual salary. Coverage will be owned by the company and includes a collateral assignment for our main small business loan. This policy ensures business continuity and protects lender interests in the event of an unexpected loss.”
Budget Impact and Compliance
Add a line to your business plan’s financial section for premium payments. For small to midsize businesses, the cost is often affordable.
Check with your accountant about how to record these expenses.
Here is a quick compliance checklist:
- Get written consent from the insured person
- File any assignment forms with your lender if needed
Keep a copy of the policy in your business files
Seal the Deal with Smart Coverage
Key person coverage is simple to set up and gives your business a safety net when it matters most. You can adjust or update your policy as your company grows. Review your coverage every year, especially after big changes. For plain answers or help choosing a plan, reach out to Everly. Their easy guides put smart protection within reach.