Key Man Insurance, also called “key person or corporate-owned life insurance (COLI),” is a policy that any business may purchase. The insurance policy covers an employee (or executives) as added assurance that the company will have the financial resources needed to continue should that vital person pass away. Small and mid-size companies are particularly vulnerable to the loss of key people. Key person insurance protects your company from the financial impact, by providing a cash infusion, due to the death of an indispensable insured employee.
For different types–and sizes–of business, this key person may vary. The following are some of the most common people business owners choose to take out a policy on:
- The “face” of the business.
- Individuals with a distinct skill set.
- A star marketing or public relations person.
- Company founder(s).
- A well-connected employee, highly visible employee.
Anyone whose death would negatively impact a business’s productivity, finances, or value, would qualify as a key person. Taking out key person life insurance on this individual offers a level of financial protection in the event of an untimely, unfortunate circumstance employee’s death.
How Does It Work?
Key-man insurance works much in a similar way that personal life insurance works, with a few differences. Individual life insurance and key man policies offer coverage for a critical employee, executives, or owners. An important distinction, the key person insurance policy protects the financial well-being of the business, not an individual.
Like personal life insurance, key man insurance policies have three essential elements; the policy owner (the business), the particular named insured(s), and the beneficiary (the company). Uniquely to key man insurance, the owner and beneficiary (recipient) are the same: the business.
Unlike personal policies, or a company-owned life insurance policy, key person coverage allows for higher potential benefits. The business will receive the entire death benefit upon the person’s death as stipulated within the policy. The business may apply these funds and used as a liquid cash asset. Businesses can sweeten their balance sheet for continuing operations, pay off investors to protect shareholder value, hire a specialized firm to attract qualified replacement(s)or avoid bankruptcy.
When properly implemented, the payout received by your company has no income tax deducted. Similar to individual life insurance policies, key person, life insurance premiums, are not tax-deductible. A KEY MAN policy may an employee benefit, as well. Even though the individual employee plays no active role in the policy, you must legally inform the key person of your intent and receive written permission from the person before purchasing the policy. All necessary paperwork will be processed and completed with your insurance agent.
Policy Types To Think About.
The Key person insurance structure is one of two central sorts of life insurance policies: term life insurance or permanent life insurance. Permanent life insurance policies can be divided, in turn, into three subcategories: whole life insurance, universal life insurance, and variable life insurance. Here’s what those policies entail:
Term Life Insurance
Term life insurance policies provide coverage for a specific predetermined amount of time (typical 10, 20, 25, 30 years), which is a less expensive policy choice. The term length for key man insurance policy purposes may target the key person’s retirement date, or when determined, to a specific date.
Permanent Life Insurance
Permanent life insurance provides lifelong coverage and may come with additional exciting choices. Unlike term life insurance, permanent life insurance policies allow for a portion of the premiums to enhance the cash-value account. The cash build up can serve as a business asset or raise funds when the business decides it no longer feels the coverage is necessary. The cash value may be used to declare a dividend for the benefit of shareholders.
Permanent life insurance policies can take the form of the following:
Whole Life Insurance
- Premiums remain the same over time.
- A portion of your premium is set aside to build cash.
- You may borrow money against the policy’s increasing cash build up value.
Universal Life Insurance
- Premiums and death benefits may be adjusted.
- It allows for higher accumulation of financial benefits.
- A portion of your premium is used to build cash.
- It has more versatility than whole life insurance policies.
Variable Life Insurance
- A portion of your premium is used to build cash.
- You can change your premium or death benefits as needed.
- The accumulating cash value is investible.
Why Your Business Needs Key Man Insurance.
Planning is central in running a reliable, stable, and sustainable business. Establishing key man coverage can be indispensable to protect your life’s work effort financially.
Without substantial assets to guarantee a loan, most banks and the SBA (Small Business Administration) require key person policies for business loans. Planning to increase inventory, equipment, make an acquisition, buy a building make another business is an excellent reason to have a key person policy in place. Even without these likely hoods, a large number of business owners seek financial security, peace of mind, and personal confidence that key person coverage will provide.
There are many businesses, large, medium, or small that lend themselves to choosing key life protections. If your business is dependent on one or two individuals’ work ethic, performance, expertise, name, and reputation, a key man policy may be the right choice.
Are you concerned with the loss of an employee, a loss of customers, and a significant decrease in sales and income? Are you worried that such a blow would decrease the value and saleability of your business? When you answer yes to these questions, the time has arrived to explore the cost of a key man insurance policy.
Establishing which policy type to choose, the amount of coverage, the person(s) to be considered, and how best to maximize the policy’s benefits can be challenging. Throughout the evaluation process, the agency you chose must have strong communication skills. Depending on the coverages chosen, an experienced, knowledgeable independent insurance agent will have several quality insurance companies from which you may choose. Not all carriers are equal.
What Is The Cost?
A key-person insurance policy’s cost will depend primarily on five factors: type of policy chosen, policy death dollar benefit, personal health history, age, and lifestyle. While there are many variables, typically if you want to insure an older individual, your policy will cost more. You and your insurance agent must look at your balance sheet, income statement, and cash flow to determine a plan that will fit your budget and growth trajectory. The ability to maintain the policy and affordability is a major consideration.
How To Move Forward.
Since 2010, Peter Green Insurance Agency LLC (PGIA) has provided businesses and individuals with “Asset Protection and Financial Security”™ by selectively using insurance coverages. Peter W. Green is the managing member of PGIA and a Certified Insurance Counselor (CIC). The CIC is an internationally recognized designation awarded by The National Alliance for Insurance to those who make the investment in dollars, time and study to gain a unique level of expertise.
Need answers to an insurance question? Have a specific insurance concern? Would you like a review of your policies prior to renewal? Call our office, 714-258-2800. Would you like to better understand key man insurance for your business? Call and ask to speak with Peter. If you rather, contact Peter by email. As told by our clients, PGIA has a unique level of customer service. Let’s talk.