Key Man Insurance for Businesses
Key Man Insurance, also called key-person or corporate-owned life insurance (COLI), is essentially a policy that a business may take out on an employee to ensure that business can continue financially should that vital person pass away. Small businesses are particularly vulnerable to the loss of key employees, and Key Person insurance protects the business and allows for continuous operations in the event of a vital employee loss.
Defining the Key Person
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 purchase a life insurance policy on:
- A star salesperson or employee with unique or distinct skills.
- A company founder or “face” of the business.
- A highly visible employee, company executives.
Anyone whose death would negatively impact a business’ productivity, finances, or value, would qualify as a key person. Taking out key person life insurance on this individual would protect the business should the untimely and unfortunate circumstances of the employee’s passing occur.
Meaningful Differences. How Does It Work?
Key Man insurance works much in the same way that personal life insurance works, with a few differences. While both personal life insurance and key man policies may offer coverage for a critical employee, an important distinction of note, the Key Man policy benefits the business rather than the employee.
Like personal life insurance, Key Man insurance policies include the owner(s), the insured, and the beneficiary. In the case of key man insurance, however, the owner and the beneficiary are the same: the “business.”
Key person coverage allows for higher potential benefits should the policy be redeemed. Should the insured person unexpectedly die, the business will receive the death benefits. The dollar amount of policy i.e. the proceeds may then be used by the business to continue operations, pay off investors or loans and protecting ownership. Additionally, conduct an aggressive search to hire a replacement, the money may be used as a signing bonus to attract a highly qualified replacement. or to avoid a tailspin or even closer. Yes, bankruptcy has happened as well.
The cash benefit from the policy, when awarded, most often are provided tax-free. As with an individual or sole life insurance policies, key person life insurance premiums are paid from after-tax dollars or income. In addition, a key person policy can “be used as an employee benefit”, since the life insurance policy may allow for transfer to the executive or insured employee by the company.”
While the individual employee plays no active role in the policy, the business must legally inform the key person of its intent and receive written permission from the person before taking out the coverage. All of the proper paperwork can be provided and completed with your insurer.
Types of Policies
Key person insurance can be structured as one of two main 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 predetermined length of time and are the least expensive policy option. For key man insurance purposes, the length of the term may be tied to the person’s projected retirement date or set to a specific date along with a business’s project timeline.
Permanent Life Insurance
Permanent Life Insurance provides lifelong coverage, flexibility, and choice. The main benefit of permanent life insurance is the cash value account. A portion of each premium payment is applied to a cash value account then accumulates continually. The cash account serves as an asset of the business, can be sold should a decision be made there is little need for the account or coverage, or may even make the business eligible to receive dividends.
- Whole Life
● 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 value.
Universal Life Insurance
● Premiums and death benefits may be adjusted monthly.
● Allows for the accumulation of bigger benefits.
● A portion of your premium is used to build cash.
● More versatile 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.
● Increasing cash value can be invested.
How Much Will It Cost?
A key-person insurance policy’s cost will depend primarily on three factors: the type of policy chosen, the policy death benefit, and the individual employee’s health history, age, and lifestyle. While there are many variables, typically if you are choosing to insure an older individual, your policy will cost more.
Why Your Business Needs Key Man Insurance?
Planning ahead is key in running a successful business. Taking out key man coverage can be vital in protecting your life’s work. The Small Business Administration and many banks require key person policies for businesses planning to take out loans or secure investments. Even without these requirements, many business owners seek financial security and peace of mind that key person coverage provides.
While Key Man Insurance may not be ideal for every business. There are several that lend themselves well to its protections. If your business is dependent on one or two individuals’ work ethic, performance, expertise, name or reputation, a key man policy may be for you. Concerned and fearful an employee loss will result in customers going elsewhere, resulting in a loss of revenue, profit margins or decrease business valuation, then Key Man policy may be for you.
Explore The Right Choice
Contemplating which policy type to choose, the ideal and/or affordable coverage amount, different strategic ideas to maximize the policy’s benefit to the firm can be tasking. A difficult decision without an experienced advisor to guide you. There are alternative choices for carriers. How do you decide? All names are not equal. Do you know what questions to ask?
Peter Green Insurance Agency LLC offers a variety of choices. Depending on the coverage amounts you chose, we can find the right insurance carrier with the best values and wide range choices to protect your company You gain an added level of financial security when the unexpected happens. Learn and read more about key-person policy options.