Why do you need Key Person Insurance?
It’s the situation that no one wants to think about: the death of an essential member of your team. It would be devastating in so many ways. Beyond the personal challenges the team would face as a result, there would also be some very real challenges for the business.
Key person insurance provides two big benefits:
- It provides cash to soften the blow to income following the loss of a key person
- It eases investor concerns by acting as a financial safety net
Most of the companies we work with need key person insurance (or “key man insurance”) because their investors require it on the term sheet. Others see the value in addressing the scary reality that huge financial losses can accompany the death of certain individuals. Kitchit’s story is a heartbreaking reminder of this.
The payout can soften the blow of the disruption to operations by assisting with some of the costs associated with the loss.
Uncertainty about job security is the last thing your team should be worried about following a tragic loss.
If you’re dealing with the death of a key person on your team, you will have a tremendous challenge ahead of you. Key person insurance makes a few of those challenges much more manageable so you can focus on your team and the future of your business.
What is Key Person insurance?
Think of key person insurance as life insurance that pays out to the company. Some policies are actually very similar to a traditional term life insurance policy. Other policies are newer products designed to cover costs associated with a key person’s death without actually being life insurance. There are pro’s and con’s to either course.
Regardless of the type of policy, the point is to protect the business and its investors. If the policy names the company as the recipient of any claim payment, the company can use the policy to help with the economic impact of the key person’s loss. Some policies can also name investors directly as recipients, specifically addressing the investor’s economic loss without worrying about costs the company itself might incur.
Key person policies can also be expanded to cover more than just death or disappearance. The impact of a key person’s death on the business could be just as dramatic if he or she was to be incapacitated in a way that prevented them from working. Permanent total disability (PTD) coverage can be added to some policies to address these concerns.
How does Key Person insurance protect your company?
Historically, Key Person insurance took a long time to get in place. There are many contributing factors here, including:
✓ Large amounts of paperwork required by traditional brokerages
✓ Scheduling/performance of medical tests required by the insurers
✓ Poor understanding of the startup space by some key man underwriters
The Founder Shield Difference
We’ve created a custom project just for busy founders! Here’s how our product compares:
Traditional Key Person Life Insurance
- Length of term – standard options include 1, 5 and 10 year terms. Most carriers are in the ten year space (with annual payments), so there are fewer options if you’d like a shorter term.
- Underwriting – full underwriting: blood, urine, possible EKG, retrieving doctor records and possible third party inspection. The process usually takes 4-6 weeks but can take longer due to scheduling conflicts.
- Carrier Quality – will always come from US “admitted” carriers (when placed by Founder Shield), meaning that the insurance companies are subject to additional state laws and regulations. In theory these policies are safer becuase a state fund will pay out claims if the carrier goes bankrupt and policyholders have more recourse for filing complaints with the state.
- Pricing – will often be lower for traditional policies (assuming the key man or woman is healthy). The carrier will have collected extensive information about the key person and the company over several weeks and will feel more comfortable quoting lower prices.
- Limits – more stringent guidelines that can make obtaining the limit you want challenging. Insurance carriers will consider the value and revenue of the company when underwriting which can be problematic for some venture-backed startups that are pre-revenue or just getting going.
- Claim payment – the policy will provide a lump-sum payment to the beneficiaries listed on the policy. The underwriting was done prior to the policy being bound.
Founder Shield's Key Person Insurance
- Length of term – this policy is designed to be for shorter terms of 1, 3 and sometimes 5 years. This is by design based on the average lifespan of venture-backed startups. After 5 years, it’s worth going through the full underwriting process of traditional key person insurance.
- Underwriting – No medical exams, no doctor visits and no financial history requests. The policy can be bound within a day or two of receipt of payment. A 5-minute questionnaire is all it takes to get a quote. This is designed to be a frictionless product tailored for VC’s and startup companies.
- Carrier Quality – This policy is “non-admitted”, which means that the carrier did not have to jump through any extra hoops to get the blessing (and backing) of the states in which the policy is offered. It’s backed by Lloyd’s of London, one of the most experienced, respected and financially sound A+ carriers in the world.
- Pricing – uniform and transparent for any key person aged 20 to 45. There is enough stability within this demographic that the carrier is able to control costs and eliminate underwriting burdens on the policyholder.
- Limits – flexibility in the limits available to policyholders. On a case-by-case basis, the carrier can offer policies with limits of up to $20M.
- Claim payment – the policy will pay the net ascertained loss to the policyholder following the death of the key person. Underwriting is done at the time of the loss to determine its full extent.
Learn more about Key Person Insurance
How it Works
“Didn’t overwhelm us with paperwork and didn’t try to sell us to buy insurance that a tech startup doesn’t need. Definitely will recommend to any startup!
“Being able to work closely with someone on our insurance needs is incredibly important!” _________________________________________
“Great mix of old-school customer service with awesome use of technology to make the process as seamless as possible.” _________________________