Key Person Insurance
Defining Key Person Insurance: Benefits and Who Needs It
If you’re a business owner, you know the exhilaration and anxiety that comes along with entrepreneurship. If you’re lucky, you have a team in place who are helping you weather the ups and downs. What would happen if they were suddenly lost or incapacitated?
Key person (formerly known as key man) life or disability insurance can provide cash to a business in such a situation. The company owns the policy and pays the premiums – and then collects the disability or death benefit if the insured dies or becomes disabled.
The business can use the benefit payout to
- Cover the cost of temporary personnel.
- Recruit and train a replacement.
- Offset lost revenue, taking pressure off production and cash flow.
- Pay off debt or buy back the person’s ownership shares, putting shareholders’ minds at ease.
- Pay severance to employees if the business ceases operations.
Really, a key person life insurance policy can cover just about any expenditure necessary to keep the business going – or to close it down in an orderly manner. You’ll want to be sure to pick the right type of insurance, in the right amount, for each individual in your key person plan.
Term insurance is a popular and affordable option. The term can be matched to the employee’s expected retirement date, and many can be converted to whole life within a certain time period after purchase. This can be an important option for employees who develop health issues down the road, possibly jeopardizing their ability to obtain life insurance in the future.
Cash value life insurance (for example, universal life and variable life) is somewhat more expensive but can provide for a buildup of cash value over the years. Even more useful, this type of policy can be set up to provide both a benefit for the business and to fund a compensation or executive benefits package for a CEO or other key individual.
A policy underwritten years before — when the employee was younger and probably healthier — can be an excellent benefit. Ownership can be transferred to the key person, and then they can then name their family members as beneficiaries. This might be great motivation to stay with the company!
Key person disability insurance can be just as important as life insurance in protecting your business. A medical diagnosis or accident can put a key person out of commission for months. Businesses can buy coverage as individual disability policies that pay a lump sum to the company rather than a monthly benefit.
Decisions regarding the amount of coverage – and who needs it — should consider
- Capitalization (outstanding shares and debt load) and projected cash flow.
- Impact of the key person’s death or disability on finance and operations.
- Coverage beyond the leadership team: salespersons, marketing team members, and technicians whose skills and contributions to cash flow would be difficult to replace.
It’s important to know that applications for key person insurance, whether life or disability, are underwritten as individuals, not groups. Each individual needs to answer health questions, authorize access to medical records, and possibly undergo a medical exam at the insurance company’s expense. Also, policy exclusions like suicide, fraud, and the contestability period apply to key person purchases just as they would for any individual coverage.
Key person insurance rates do not differ from those for individual insurance. However, if the business pays the premiums and the contracts are set up correctly, the cost of covering a key employee can be deductible as a business expense. As a business owner, you may even be able to use business income to provide life and disability insurance for yourself.
An independent insurance broker can obtain quotes from several companies. This is the best way to find out which insurance company is the best provider for each key person.
Key person coverage gives company leaders the time and means to make the best decisions at a sad and difficult time – and provide a way to offer benefits to valuable team members. Monarch Insurance Partners’ experienced team can help you with a comprehensive plan to protect the business you’ve worked so hard to build.