The What, When and How of Key Man Company Insurance

Key Man Insurance is a crucial Insurance in the workplace that allows the business to survive if a key employee is lost. To put it simply, it is a policy taken by the company on the key employees who are the driving...

The What, When and How of Key Man Company Insurance

Key Man Insurance is a crucial Insurance in the workplace that allows the business to survive if a key employee is lost. To put it simply, it is a policy taken by the company on the key employees who are the driving force for the company’s success. This policy is usually of very high value and pays out if the insured person (key employee) dies or become disabled. Get more details on

The benefit of purchasing a Key Man insurance is not understood by all the businesses. For example, 60% of the Americans have personal Life Insurance, but key man Insurance is taken only by 22% of the businesses. This article is all about the basics of Key Man Insurance.

What It is

As mentioned above, Key Man Insurance is a policy to cover the loss when a key member dies or becomes disabled. This is purchased by the company to cover the loss and the beneficiary is also the company. Key Man Insurance includes Life Insurance and disability insurance. Key Man Insurance is insured against a key person because

  • He is the major contributor to the profits and revenues of the company
  • He has special talent and deep knowledge of the business

This means that in case there is a need to replace him or her due to death or disability, it will be a costly affair for the company. Key man Insurance comes to the rescue at this point in time. The business will receive a payout. This means that the business will be able to function continuously in this difficult phase.

What It is Not

Other types of business life/disability Insurance are used to fund a buy-sell agreement. These insurance policies are owned by the business owners and they are the beneficiaries of the policies. But in Key Man Insurance, unlike other policies, the owner, premium payer and the beneficiary of the policy is the company. It is solely purchased by the company to continue the business even if the key person dies or become disabled. Hence, it is not a buy sell Insurance arrangement.

Does a Business need Key Man Insurance?

A Business can take years to run and grow successfully. It needs the expertise of key persons to lead the company in the right direction. But the business might also lose a key person suddenly and the expertise and knowledge are also lost in a heartbeat. This is particularly crucial for small businesses as the major percentage of small businesses depend on one or two key people for the company’s success. But as against the need, only one-quarter of the small businesses have Key Man Insurance. This is high risk because the survival rate of the small companies drop drastically if a key person dies or become disabled.

More than the large companies that benefit out of Key Man Coverage, the small businesses are the ones that will be benefitted more.

How Much It Costs

Key Man Insurance premiums range from few hundred dollars to few thousand dollars per year. The amount depends on the number of key persons insured and the coverage amount. It is usually an affordable investment. But note that permanent Life Insurance is costlier.

Let us look at some of the factors based on which the cost of key man coverage varies.

  • The age, gender and health of the person: It has been found that men pay more premium than women and smokers pay more than 100% premium. Also, the premium is higher if the insured person is older and has any pre-existing health issues.
  • The size of the Company and Business: The cost of the coverage is less for a small company having two or three key employees compared to the cost for a corporation with key employees. If the value of the business is more and the number of contributors to the to the business is more, the premium and the amount of coverage will eventually be more.
  • Higher Risk: If the company has a higher risk rate, then the premium to be paid will be higher.
  • While the term policy is inexpensive, adding disability coverage will cost extra. Permanent life insurance usually costs more than the term life insurance.

How Much Coverage You Need

Now that we have discussed how the Key Man Insurance works and its costs, we will discuss how to figure out the right coverage for your business. There is no single method of determining the coverage for your needs. But here are few things that might give you an idea of selecting the right one.

  • The Compensation of the Key Person: The basic calculation of the coverage is based on the key person’s compensation. It is about 5 to 10 times of the person’s yearly compensation.
  • It takes both time and money to look for a replacement in the event of loss of a key person. The coverage is what you will need to hire and train the replacement for the key person. In addition, one should also make a rough calculation of how much the company’s revenue will decline during the “search, recruit and train” period.
  • By calculating the percentage of company profits the key person has contributed, key man policy is calculated.

While the best approach has been discussed above, it is always better to take the advice of a business advisor or an insurance agent. They will help to purchase the right coverage for you.

Want to know more about us?

  • About Us

    We are pioneers in Individual and Corporate Wealth management.

    View More
  • Email Us

    For more information about us, please Email Us through using the following details...

    View More

Follow us on...

Follow us on these social networks