After the first major funding round key man life insurance is generally the most inexpensive insurance coverage investors want a company to purchase. Unfortunately, it’s also the most time consuming for founders. Jumping through a life insurer’s hoops can be draining for even the healthiest of insureds.
There are two main coverage concerns with key man life insurance – face value and term. The face value is the amount the policy will pay in the event of the death of the insured. The term is how long your premium is locked in for. If you purchase twenty year term and find cancer in year two, you have another eighteen years of coverage at the same premium guaranteed. Longer terms and higher face values are more expensive. Most tech startups purchase $1M on each key employee on a ten year term.
Young, healthy entrepreneurs can generally buy $1M in life insurance for under $300 a year. With prices this low insurance companies cannot afford to make mistakes – they want to ensure their policyholders are as healthy as they claim they are. The questions, exam and labs are frighteningly detail oriented.
The first step in securing key man life insurance is the phone interview. They will ask for basic information like your drivers license number to pull your record. A series of invasive questions about your health, that of your relatives and your lifestyle will follow. Providing truthful answers is important – a lie can invalidate the policy. If you have health conditions, a history of smoking or a bad driving record the price will be higher. However, a good broker can find an affordable carrier who is comfortable with your situation.
The second step is in person lab work. The insurer will ask for a good time to send a paramedic to your home or office. That person will show up with a backpack containing a scale, blood pressure cuff, tape measure, needles and collection jars. The exam will consist of verify your weight, height and blood pressure. They will draw a tube or two of blood and collect a urine sample – all in the comfort of your home or office.
The final step is the policy issuance. When you first apply for life insurance your broker will give you a rate based on what health class they think you will fall into. If the insurer finds concerns with your well being they will issue the policy in a higher premium class (very rarely will it work the other way). If the premium is acceptable the insured signs the policy and writes a check to the insurance company and coverage is in place.
The entire process can take months, especially if the insured has had health concerns and the insurer wants to see medical records. Working with a specialist tech insurance broker is key to creating a comprehensive insurance program that will grow with your company. All investors have demands and concerns based on past experience – a good insurance partner can help you negotiate reasonable coverage with your investors and advisors.