Many VC investors require founders going through an institutional round of funding to get key person insurance. For those of you that are nearing the close of your first big seed or series A round, there are two routes you can go in procuring your key person insurance policy: The traditional route or the Founder Shield route.
How traditional key person insurance works
Step 1: Insurance Needs Discovered
There are definitely reasons why startups and small businesses should consider getting key person insurance independently. That being said, most founders discover the need for key man coverage when they’re itching to sign the term sheet for their round of funding. The founders usually have 60 days post-close to find the required insurance. It’s your responsibility to get it done!
Step 2: Information Requests
The company then sets out to find a broker/agent to work with the insurance companies and get the policy underwritten. No matter which broker you go to and who ultimately underwrites the policy, this process will be pretty intrusive. Remember that key man insurance is essentially just a life insurance policy that pays out to the company. This means that you’ll have to divulge all the details about:
- Yourself: financial status and history, family and medical history, family doctor information, detailed travel plans, your family’s personal information, etc.
- The Company: full financials, ownership structure, roadmap, workforce composition…
This part takes up a fair portion of a funded entrepreneur’s most valuable asset: time!
Step 3: Medical Exams
Next come the medical exams. Each key person will need a medical exam to evaluate their health before the policy is underwritten. Fortunately, this can be done with a house call or office visit. It saves you a trip to the doctor, but you still have to go through an extra physical that takes away more of your valuable time.
Step 4: Underwriting
Once steps 2 and 3 are complete, everything can be submitted to the underwriter. This is where the policy terms are written and the final pricing is determined as the underwriter reviews the information, lab reports, exam notes, etc. This process usually takes around 4-5 weeks to complete. There’s a chance that more questions will come up during this phase, causing the underwriting to take even longer.
Step 5: Policy & Payment
Finally! You have the policy terms and know what pricing will be for the year. Note that pricing will likely be locked in for at least a couple of years, but may end up increasing on a graduated scale after that. Payment of premiums will be made annually until the policy is cancelled.
If you’ve made it to this step, congrats! You’ve officially navigated the steps necessary to get key man insurance. Has it been 60 days yet?
Step 6: Making a Claim
Hopefully you never get to this step. If you’re here, it means that a traumatic and serious/fatal injury or illness has struck one of your key persons. While you may have originally been checking the box on the term sheet, this is where the policy really shows its value. It’s time to collect the proceeds and figure out how to use them to fill the gap that your key man once filled. The money can be used to pay off debt, cover the costs of finding a replacement, or replace lost profits for the loss in operating efficiencies during this difficult time.
So there you have it: a basic overview of how key man insurance works. Not the exactly the most seamless or intuitive process, right?
How Founder Shield key person insurance works
As startup folks, we instantly recognized the pain point caused by this process. Investors require their portfolio companies to carry key man insurance to protect their investment, but the process of procuring key man insurance wastes their portfolio companies’ valuable time. It’s pretty ironic, really.
Founder Shield has worked tirelessly with brokers and carriers with decades of experience in the space to come up with our new key man product. With Founder Shield Key Man coverage, steps 1-4 are no more! You fill out 11 questions, send payment, and the policy is bound within 48-72 hours of receipt of payment.
It’s that simple.
If you couldn’t already tell, we’re working really hard to make sure we save you as much time as possible. And in fact, entrepreneurs don’t actually have to do any of these steps. Our new key man product can actually be applied for and paid for by your investors! They just need to fill out the form and send payment on your behalf, and you’re covered. All we require is that an authorized representative of the company other than the key person (i.e. one of your investors or co-founders) sign the final application. This helps warrant the validity of the statement that the ensured person is in good health.
Steps 5 and 6 work exactly the same: payment is made in the form of annual premium payments, and claims are made for the same reasons. Pricing for Founder Shield Key Man insurance is uniform for key persons up to the age of 45. After 45 there may be slight price increases on a graduated scale, but the easy, carefree process does not change!
So, what’s the catch? Our uniform pricing model may result in some extraordinarily healthy key persons to pay a little more than they would under the more personalized traditional model. Most of the people we work with consider the time-savings of our program to far outweigh the potential cost-savings under the traditional program, but we can take you through the traditional route as well if desired. However, the traditional route may actually result in higher premium if an ailment or illness is discovered in the process of going through family health history and health exams.
Overall, we recommend saving time and energy by avoiding the traditional key person underwriting process. Get it done quick and easy with Founder Shield’s exclusive key person program!
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