Key Person Insurance

Replacing a key employee usually involves a significant investment of time and money. Should you take out insurance in case that key person dies or becomes disabled? This type of insurance policy is known as key man insurance, or sometimes key person insurance. This type of coverage can help you maintain your business through difficult personal and financial times that can result from the loss of an essential employee. Here’s what you need to know about key man insurance.

When a business buys key-employee coverage, it owns the policy, pays the premiums and is the beneficiary.  Key-employee insurance can be a cornerstone of your business-protection strategy. How much insurance you purchase will depend on your financial-replacement needs balanced against what you can afford in premiums.

How does a key man policy protect your business?

There are two main types of key man insurance: life insurance and disability income insurance. The business is usually the owner and the beneficiary.

The insurance payout from a key man policy can help cover the cost of hiring and training a new employee and make up for any lost revenue during a transition period. If you plan to sell the business, it can help cover expenses until the business receives a fair offer.

Key man disability income insurance is typically sold as short-term disability insurance that pays out benefits for about six to 24 months if the employee gets sick or injured. It usually costs more than key person life insurance, but with good reason: the risk of losing an employee to disability is greater than losing them to death, so the odds of an insurance company paying a claim are higher.

What length of coverage should you buy?

To protect your business in the event of a key employee’s death, you’ll typically want to purchase a term life insurance policy for this key person. This type of policy provides coverage for a specified number of years (for instance, five, 10, or 20 years) and is usually affordable, as long as the person covered is in good health at the time of purchase.

Can a key man policy benefit an employee?

Yes, you can create a key man policy to be used as an employee benefit.

Key man insurance that is funded with whole life insurance can be an excellent employee benefit, while still providing your business the protection that would otherwise be secured through a term policy for the company. To create a key man insurance policy that can protect your business AND benefit your employee, you may want to consider purchasing a whole life insurance policy on the employee. You would still own and be the beneficiary of the policy, meaning your business will have the protection it needs. But, unlike term life insurance, whole life builds a cash value over time. Once your key employee retires or leaves your business amicably, you can provide them with the cash value that the policy may have built over the years.

The information presented is general in nature. It has been obtained from sources believed to be reliable, but no warranty is made as to its accuracy, completeness, or timeliness. This information is not intended as, and should not be construed as legal, tax or investment advice, or a legal opinion.