What is key man insurance?
Key man insurance, a.k.a. key person or key employee insurance, is coverage that will protect a business in the case of an untimely death or disability of a top salesperson, executive, or business owner. The loss of a top manager or executive to a disabling injury or death would have devastating effects on most companies. Buying key man insurance allows businesses to plan for these unforeseen events and be prepared should death or disability strike a top performer.
Could your company bear the loss of a key executive or key employee? Who will lead your company when the CEO retires? What if your top salesperson or partner becomes permanently disabled? Do you have a plan? Having a key man insurance policy can help you answer these questions with confidence.
We specialize in assisting organizations of all sizes to protect their most valuable assets, their people. In most cases, the cost of a keyman insurance policy is negligible and very easy to obtain. Don’t make a critical mistake and let the lack of necessary planning sabotage your business’ continued success.
Key man insurance policy – a simple and easy way to protect any business
Key employee insurance definition
- Individuals with creative abilities or technical experts, including software developers, inventors, scientists, or anyone with a niche talent.
- Sales professionals that have extensive experience and a track record of exceptional performance. Many extraordinary salespeople have cultivated relationships with vendors and high-end customers that allow them to exceed sales goals continually. This “goodwill” is precious and hard to duplicate.
- Senior-level executives that are responsible for managing the daily operations of the company or are responsible for a unique project or development program.
- Anyone whose death or disability would negatively impact the business credit or financial solvency of the organization.
- License holders that are fundamental to the continuation of the business. Contractors who hold vocational licenses are one example.
- Organizational leaders such as pastors or heads of non-profit associations who are vital to the continuation of the institution.
- Owners that want to plan for the successful business transition of the company in the event of the death or disability of a shareholder, Significant problems can arise with death or disability of an equity partner. Chiefly, how is the surviving family member’s share in the company going to be settled?
Who needs a keyman insurance policy?
Businesses or organizations desiring to minimize risk and prevent the potentially devastating effects of the death or disability of a critically important person should buy a keyman insurance policy.
It is needed by a wide variety of entities and for many reasons but is generally crucial to small and medium-sized businesses. These companies depend on the expertise and talents of a limited number of individuals. The death or disability of one key person may well be a fatal blow to the company. If the loss of one person would threaten your business, you should seriously consider purchasing one or more key person insurance options.
Building a successful business takes years and considerable effort. Lack of planning can cost you significant energy and investment and is simply not a sound business practice. The great news is the cost of keyman insurance coverage is relatively inexpensive, and it is easy to obtain in most cases!
Why buy key man insurance?
Key man insurance is a simple solution to a potentially catastrophic problem. It is an inexpensive tool to protect a corporation or other business entity from the damaging effects of the loss of a key employee or business owner. It is also a logical way to ensure that a business can retain options and flexibility if a key person dies or is disabled.
Without a key man insurance policy, options may include hiring and training a replacement employee, paying the business debt and liquidating the company, or “buying time” to sell the company at its fair market value. Most businesses have no option other than to close the business or sell it to a competitor at a significantly reduced “fire sale” price. With the relatively low costs to acquire a key man insurance policy, there is no reason to postpone planning for this potential crisis.
Key man policy uses
- To ensure cash is available to recruit and train a capable replacement employee
- As a collateral requirement to guarantee an SBA loan
- Providing liquidity to meet unexpected cash flow expenditures until a disabled employee can recover
- Creating immediate cash to pay off debt
- Buying back stock from a deceased or disabled owner’s estate
- Salary continuation arrangements to surviving spouse
- Executive benefits to key employees to help tie them to your company, commonly referred to as “Golden Handcuffs.”
Key Man Insurance Policy Types
Simply stated, key man insurance is a fundamental risk management strategy for all types of small and medium-sized businesses. It has been a well known concept for many years and is crucial for any company that would be significantly affected by the loss of one or two key people.
There are a number of key man insurance policies, but they generally fall under two types:
Key man life insurance works the same way as an ordinary life insurance policy. The primary difference is coverage is owned and paid for by a business with the business being named beneficiary. In the unfortunate event, the key person passes away, the death benefit or face amount is paid directly to the company.
There are many variations of key man life insurance, but the most popular type of policy is a 10-year term life plan. In many cases, there are options for no exam key man term insurance. See sample rates for key man insurance calculator below:
How Much Does Key Man Life Insurance Cost?
| Age | $250,000 (Exam) | $250,000 (No Exam) | $500,000 (Exam) | $500,000 (No Exam) | ||||
|---|---|---|---|---|---|---|---|---|
| M | F | M | F | M | F | M | F | |
| 30 | $107 | $100 | $154 | $119 | $155 | $140 | $210 | $150 |
| 40 | $127 | $125 | $187 | $161 | $195 | $185 | $273 | $203 |
| 50 | $275 | $223 | $312 | $263 | $395 | $263 | $485 | $438 |
| 60 | $663 | $490 | $785 | $564 | $1,225 | $870 | $1,463 | $956 |
| 65 | $1,105 | $768 | N/A | N/A | $2,110 | $1,400 | N/A | N/A |
The key man insurance calculator table above shows average rates for males and females in different age brackets, both for medical exam and no-exam key man insurance policies.
For alternative insurance amounts and term durations, you can get a custom key man insurance quote instantly on this website. Our exclusive database contains key man life insurance rates for over 60 of the nation’s best key man life insurance companies. There are thousands of scenarios that you can compare within a few minutes.
Keyman disability insurance is a risk management strategy designed specifically for the threat of a short-term loss of a key person due to a disabling accident or illness. These policies will provide cash to replace the value provided by the key person or to provide monthly income to hire a capable replacement. Like key man life insurance, a business owns the key man disability policy, pays the premium, and is the sole beneficiary.
Key man disability insurance is a specialty policy and is therefore not offered by many traditional insurance companies. These policies are usually custom-designed for the exact needs of the business. Therefore, sample key man disability quotes are not available for comparison here but can be provided relatively quickly upon request.
How Much Key Man Insurance Coverage Will You Need?
Determining how much key man insurance coverage you may need to buy is not rocket science. However, you should spend some time brainstorming on why you are considering the insurance. You should ask yourself the question, “Why do I need key man insurance?” The answer to this question will give you a great idea of the type and amount of coverage you should purchase. If you carefully consider the impact to your company from the death or disability of a key person, you can begin to understand the level of protection you need. The ultimate goal should be to get the right amount of insurance to achieve your company’s objectives and not a dime more.
For more detailed information, see “How much key man life insurance do I need?“
Advantages of Key Person Insurance Coverage
Included below are just a few of the many benefits to your business:
- Buying key man life and disability insurances are relatively inexpensive. In most cases, cheap term life insurance is a great solution.
- Applying for key employee insurance policy is generally painless. There may be an exam required, but in some cases, there are even no-exam key man life insurance policies available.
- Security and peace of mind knowing that the business is protected.
- Proceeds of keyman life and disability insurance are generally received by the business income tax-free. For more detailed information, see key man insurance taxation.
- It can provide benefits to retain key executives.
What a Key Man Insurance Policy Cannot Cover
While a key man insurance policy is a viable risk management strategy for many businesses, there are a few instances where it is not applicable.
A few of the examples include:
- It cannot be purchased to protect against an employee leaving your firm to work for a competitor. Unfortunately, this is not a definable risk.
- It is usually not available to non-employees. In other words, 1099 contractors are generally not insurable under the key man insurance scenario as insurers feel like capable replacements are readily available for hire. There are exceptions under “exclusive” special contractual arrangements.
- It is not critical to cover a non-key person. For example, key person insurance is not usually available for the position of office assistant as a capable replacement is not too difficult or costly to find.
- Key man insurance is not a solution in any other situation where an insurable interest is not present. An insurable interest exists when the death or disability of a person would cause the business to suffer a significant financial loss.
Protect Your Business Today with Key Man Insurance!
As a business owner, chief financial officer, or board member, you have a responsibility to make sure you minimize business risk. Keyman insurance is a cost-effective way to eliminate the unnecessary risk associated with the disability or death of a critical contributor to your organization.
Whether your business is a start-up trying to secure financing or an established company requiring business succession planning, our insurance professionals have the expertise needed to ensure your company gets a superior solution at the absolute best value.
A well-structured key man insurance policy could very well be the difference between your company’s continued success and its ultimate demise. The obligation to mitigate key man risk is your responsibility. Visit our blog to learn more about key man insurance.
