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Small Business

Insuring Your Top Assets

By Karen E. Klein

Q: I wonder if you can explain key-man insurance?

-- T.M., Seattle

A: "Key-man" -- or perhaps more accurately "key-employee" -- insurance protects a company against the loss through death of an employee considered critical to its future. Such insurance has been available for decades, but it has gotten a lot of attention in the aftermath of September 11. Property, buildings, equipment, furniture, and other material assets are obviously important to a business, but none of them compares in value to a longtime CEO, an experienced financial officer, or a top salesperson, experts say.

Business owners traditionally look at a piece of machinery or a building and know what it's worth and insure it accordingly. But people tend not to look at their employees the same way, even though human resources are any company's top assets. "Say their office building is worth $1 million -- of course the company insures it," says Larry Stone, principal of Stone Tapert Corporate Financial Services in Pasadena, Calif. "But their key employee may bring in $3 million or $4 million over the life of their association with the company."

Stone points out that an employee's knowledge about the company, years of experience, and relationships with customers, clients, suppliers, and competitors will be gone, too. "The loss of that person is huge for the firm," he says. "How much is it worth?"

JACKS-OF-ALL-TRADES. Insuring such critical employees and making formal plans for handling the financial details, family compensation, and company-leadership transition in case of an unexpected death is especially important to small and midsize companies. Smaller companies are more likely to have a few top employees who are jacks-of-all-trades, doing multiple tasks that no one else knows how to perform. Key-employee insurance is typically bought for founders, CEOs, financial officers, sales directors, the top research officer, and leading rainmakers.

Stone recommends that companies interested in this coverage consult a financial-services firm, since many property-and-casualty insurance brokers are focused on material assets rather than people assets. A good financial consultant will work with you to determine which employees should be insured and for how much. Key-employee insurance doesn't have to be prohibitively expensive, says Stone. It "accumulates cash value, so the cost of purchasing it is reduced."

For more information, start by visiting the Web site of the American Insurance Assn. and the Insurance Institute of America. Both sites have good basic insurance information and links to other helpful Web pages. Have a question about running your business? Ask our small-business experts. Send us an e-mail at, or write to Smart Answers, BW Online, 46th Floor, 1221 Avenue of the Americas, New York, NY 10020. Please include your real name and phone number in case we need more information; only your initials and city will be printed. Because of the volume of mail, we won't be able to respond to all questions personally.

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