The term Key Man Insurance is interchangeable with Key Person Insurance or Key Employee Insurance. This type of coverage protects companies in the case of an untimely death or disability of a top producer whether that is a salesperson, executive or business owner. The main attraction for key man insurance is it provides money to the business so it can continue operations without disruption in the event of a key employee’s unexpected death. This gives the business owners and shareholders peace of mind to invest and make decisions knowing there is a way to replace a key individual’s contribution to the company. In the short and long run of your business, having key person insurance may be the difference between the company’s demise and its ultimate success.
Don’t make the mistake of thinking Key Man Insurance is only life insurance because in many situations those key individuals actually fall victim to a disability and companies have no way of replacing that very important person if disability strikes. It is true that the risk one might die is always present, however, for most people the risk of suffering a disability is much higher than the risk of death. That simply means that to totally protect your company or business you will also want to look into a Key Man Disability policy as well for any person in your company that you feel would be hard to replace. That can be an owner, a salesman or executive.
One of the hardest things to determine is whether you really need this type of insurance coverage at all. While it may not be necessary in large companies, there are many companies that are small to medium in size where success depends upon a few top individuals that posses niche talents, skills and experience. It is known throughout the company that these key employees are critical to the long term performance of the business. If the business were to lose one of these critical employee’s due to a death or disability it would have a crippling effect.
Again, the solution to protecting your business is purchasing a key person insurance policy to provide financial means to stabilize the company during the adjustment period after the loss of a key person in the company.
It is during the time of death or disability that a business can lose critical skills, which could lead to a period of falling sales or productivity. At the same time significant costs could be incurred while the company identifies and trains the person or persons that have the ability take the place of the person the company has lost.
Ask yourself if your company or business would be dramatically impacted by the loss of one or more of your top people? Do you think key man insurance can effectively protect against this risk? Should you or your company consider purchasing key man insurance policies to protect your business from this type of loss? All questions best asked up front and not left to fate.
How Key Man Insurance Works
We find that many businesses and business owners regularly use life insurance and disability insurance to protect themselves from the risks associated with their potential death or disability. Key Man Insurance works the same way. Using life and disability insurance, a business can insulate its losses by purchasing policies on key employees in order to cover the amount of funds needed to adequately replace them in the event of a death or disability. Most companies find that the cost associated with securing key man insurance policies is very small relative to the potential benefit if a key worker dies or is disabled.
With both policies, the business secures the policy on the life of the key person and is both the owner and beneficiary of the policy. In other words, the business owns the policy, pays the premiums and is the beneficiary in the event the key employee dies or is disabled. The premium payments made by the company are most likely not tax deductible. However, in most cases, the proceeds received are income tax free. Make sure you check with your accountant to have all the facts before purchasing your policy or policies.
Sometimes key employees think you are getting them life insurance for their benefit. Please make sure they understand that key person insurance policies are designed to protect the business; not the key employee. This means that if the key employee dies or is disabled, the policy proceeds go to the company and can be used by the company for any reason.
While the intent of a company might be to use the funds received from a key man policy to cover expenses associated with finding capable replacements or to cover short term revenue deficits, they are not held to use the money for those purposes. If a company has a different need it is free to use the money anyway the owners or shareholders would like.