Who is a Key Person?
Every business has employees who are highly trusted, knowledgeable, and experienced. A key employee is often a combination of those three characteristics. All businesses—regardless of their size—have at least one key person. This person is absolutely crucial to the life of the business.
Many small businesses employ multiple key people. It might be the owner or founder of the company, or it may be a supervisor or manager who has been with the company for years. Or it might be that dynamic and prolific salesperson who brings in the bulk of your income. So how can key man life insurance protect your business?
SUMMARY: Key person insurance helps pay a company's operating costs in the event a key person in the company dies or becomes permanently disabled until a replacement is hired. The beneficiary—and person who pays the premium—is usually the business.
What is Key Person Life Insurance?
Key person insurance is a business insurance policy—similar to a life insurance policy—which is taken out to protect the business from the loss or long-term incapacity of a key executive or employee of the company. It is often referred to as key person life insurance, key employee insurance, key man insurance, or business life insurance.
Often used to insure management and ownership, key person insurance is being used more and more to insure employees who make significant contributions to the operation of a business. For instance, a top salesperson who represents a high percentage of the company’s revenue may need to be considered for key person insurance.
While there is no clear definition, this form of business insurance has become very popular and is sometimes required by a lender to secure financing for a business.
Key person insurance is also offered in multiple types:
- Term Life Insurance: This version provides coverage for a specific length of time versus the employee's entire life. For example, it can be set to cover a specific person until their projected retirement date. The business receives a death benefit if the key man or woman dies while the policy is in force.
- Permanent Life Insurance: Permanent life insurance not only covers the key person for their entire life but a portion of the premium is contributed to a cash-value account. This account can be used as business collateral. It can also be sold in a life insurance settlement if the company's coverage is no longer needed. Just like term life coverage, the company will receive the death benefit if the insured person dies.
What Does Key Person Insurance Cover?
We’ve already established that a key man or woman is an individual that is highly important to the continued operation of a business. A key person policy comes into play in the occurrence of death OR the permanent disability of the key employee. In the event that this happens, the company will be paid benefits which could typically include:
- The time and cost it takes to replace and train someone to take the vacant position to continue the business
- The cost to cover lost profits, pay off debts, cover payroll, etc. while a suitable replacement is hired and trained
- It can also cover the sale of the company to distribute money to investors.
By minimizing the impact of the death or loss of a key employee due to disability, creditors, customers, and employees are assured the business can continue to operate with minimal impact.
How is Key Person Insurance Different than Life Insurance?
Key person insurance is sold as life insurance and also as disability insurance. The key difference between this policy and a life insurance policy is that the business pays the premiums for the policy and the business is the beneficiary of the policy. Any proceeds disbursed by the policy are necessary to continue the operation of the business. In short, key person insurance allows the company to continue to function by paying the company for the loss of your key person and/or people.
How to Determine if Your Business Needs Key Employee Insurance
A small business should consider purchasing key person insurance coverage if:
- Would the loss of the employee sink the company?
- The business cannot function without the owner, key executives, or key employees
- You want your business to have an alternative to bankruptcy
- You are required to purchase key person insurance policy for a business loan
- Key person insurance isn’t usually necessary if you are the sole proprietor of your business.
Small businesses are at a greater risk in the event of key person's death or permanent disability. Many cannot survive long if they lose the person who is the driver of their success. That's why this insurance policy can be so important—it protects the life of your business.
NOTE: To obtain this policy through an insurance company, the employee(s) in question must agree and allow the business to purchase this life insurance.
How Much Does Key Person Insurance Cost?
How much key person insurance costs will vary depending on numerous factors, including:
- The type you purchase (term life insurance, permanent life policy, death benefit, etc.)
- Whether or not you're covering multiple key employees
- The role of the employees being covered
- The person's age and overall health
The cost of key person insurance can start as low as $100 a month while taking numerous factors into account.
How Much Coverage Does My Business Need?
Because a business pays the premiums for a key person policy, that business must determine the policy premiums that they can afford. Many life insurance companies offer $100,000 policies up to $1 million policies. Talk with an agent to receive a quote for each level of coverage from the insurance company of your choice.
Get a Free Key Person Insurance quote
You will want to meet with a licensed insurance professional to decide the amount of the benefit, who your key person or people are, and how much you should be paying in premiums for your key person life insurance. You will also want to discuss whether you want to cover the risk of your key employee(s) death or disability. Or both. At Tivly it's our mission to connect you with the right insurance company for your small business.
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