Key man insurance for startups doesn’t really exist in the life insurance markets. There are a few reasons for this and I’ll explain the big ones.
Why traditional Key Man Insurance doesn’t work:
1. Valuation One of the major metrics that life insurance underwriters use is valuation/capitalization. Usually underwriters will look at the financials to get a sense of what revenues a company is generating. They’ll also look at fair market value. They use these numbers to justify (or deny) the multimillion dollar policy limits the companies are requesting. This practice clearly poses problems for venture-backed startups seeking key man insurance. First, many startups are pre-revenue or just starting to see some revenue. Second, giving a startup a documented fair market value may: a) trigger terms in certain equity and convertible debt instruments (not good!), or b) be completely and recklessly speculative. The bottom line is neither of these metrics really give the underwriter a clear picture. This leads to declinations and a long back-and-forth conversation. The underwriters usually say something like, “this company has no revenue and is worth $3M at best. Why do you need $2M in coverage for each of the 3 founders?” “Because our investors said so” isn’t really a satisfactory answer.
2. Efficiency (or lack thereof…) The key man evaluation process is kind of intense. Not only do you have to provide financials, sensitive family history information, and personal wealth information, but you have to take a medical exam. All of this means the depletion of the most valuable resource for any entrepreneur: his or her time. By the time information is collected and delivered, medical exams are scheduled and given, and the underwriting is finished, months can pass. No modern entrepreneur is used to anything taking months, so the end result is an overall poor/frustrating experience.
The Founder Shield Advantage
Luckily this is all in the past! The elusive product now exists: key man insurance for startups. With our new Key Man Insurance product, all the Key Man has to do is answer a few basic questions and he or she is completely done. No personal questions, no medical exams. There is no lengthy underwriting required and policies are provided at a flat rate of $1750 (plus state taxes) per $1M of coverage. If you’re in need of some quick and easy key man insurance, and can grab it right here or check this out to learn more.