My company has a $1 million life insurance policy out on me. It was a condition of landing our VC funding when we launched Personal Capital. That's standard operating procedure in Silicon Valley. Investors aren't going to dig into their pockets without knowing there's a financial backstop that would help the business weather the sudden death of a key employee.
Step outside the Valley, however, and you'll have a tough time finding an entrepreneur carrying this insurance. According to a National Association of Insurance Commissioners survey, seven in 10 small businesses reported being "very dependent" on a few key employees, yet only 22 percent of the companies had insurance policies that would deliver money in the event that a key employee died or was disabled. That data is from 2007 (the most recent available), but given the rough economy since then, it's unlikely to have changed.
To be blunt, you are nuts if your business doesn't carry key-person insurance on you or on any other integral member of your team. Not going after VC funding? Fine, but if you're interested in a loan backed by the Small Business Administration, it's typically required.
More important, do you really want to leave your company high and dry if something happens to you or another crucial employee? With a life insurance policy in place, you give your business the ability to regroup after a loss.
Key-person insurance can be ridiculously affordable. There are two broad types of insurance: term and permanent. Term, which pays out for a specific period of time--hence the name--is cheap. Permanent, which includes a side investment component, is way more expensive. Stick with term. It's all you really need, and it won't put a dent into your cash flow.