What Is Key Person Insurance?
What Is Key Person Insurance?
Key person life insurance, sometimes called key man insurance, is a life insurance policy that a business takes out on the life of a key owner or employee.
Who Benefits from Key Person Insurance?
The business owns and pays the life insurance costs, and when that person passes away, insurance companies pay the death benefit directly to the business. The company can use the money for anything its leadership decides.
What Does Key Person Insurance Cover?
If you lost a key employee, you would want business to continue, meaning there would still be bills to pay and payroll to make. You may also need to consider hiring someone to take their place or need cash to buy out the deceased person’s ownership shares. Even if the business were to shut down, there may be liquidation expenses, debt to pay off, and employee severance payments.
Types of Key Person Insurance
Sometimes lenders require that a business buy life insurance on key employees. The amount of coverage can be matched with the amount guaranteed by the loan, providing protection for the lender in case the entrepreneur for whom they have approved business loans passes unexpectedly.
The first step in determining whether your business needs key person coverage is to name those whose absence would halt or impair business, whose reputation is key to profits, or who would be hard to replace. Owners are often covered, whether it’s a large or small business. Not only would an owner’s energy and time commitment be missed, but their ownership shares may need to be liquidated. Key person insurance proceeds can reimburse the deceased owner’s estate for the value of the shares.
Variable life key person insurance
Any type of life coverage may be appropriate for a key person policy. Term life insurance is often appropriate. Term lengths can be matched to the length of their expected employment. A variable policy will allow the buildup of cash value, perhaps appropriate if the company plans to transfer ownership of the policy to the employee at retirement.
How Much Key Person Insurance Coverage Should I Buy?
Once you have identified those persons who should be insured, the next step is to determine the amount of coverage for each. For some positions (e.g., a salesperson), the amount of the death benefit can be ballparked by their results (e.g., annual sales). For others it might be more accurate to determine a cost-to-replace or “multiple of compensation” figure. Employee ages and health will affect pricing. In general, employees with a shorter life expectancy can expect a higher premium. When the company pays the premiums, costs are not deductible as expenses unless included in the employee’s pay and subject to income taxes.
Purchasing life insurance can get complicated, but Monarch Insurance Partners can walk you through the entire process from strategy to application to policy issue. Contact us for life insurance quotes, or to discuss key person or personal life insurance.