Businesses of all shapes and sizes have staff members that are essential to the operation of the business. These “Key” people are vital to the function and success of the organization. Key man life insurance or key person insurance can help businesses weather the initial storm when these key members of the organization are no longer able to perform their duties to the organization. Some businesses have multiple employees that are essential to the continued operation and success of the business. In these instances, businesses may consider a key man life insurance policy for each of these individuals.
A key man policy is a type of life insurance policy companies takes out to provide some financial relief after the loss of their most valuable employees. The better you understand this type of insurance policy, the better you can protect your organization after the loss of these valuable employees.
What is Key Man Insurance?
Key man life insurance or key person insurance is a type of life insurance policy business organizations purchase for people who play substantial roles in the business. Often, this person is the owner or founder, but can also be an employee who is vital to the successful operation of the business. In other words, someone who is so important to the business that it is likely to falter substantially, or even fail in that person’s absence.
If your organization loses a key employee that is covered by this type of policy through death or disability, the company receives a payout from the policy. This financial payout provides time for management to determine the next step for the business, softening the financial blow for the business.
What is the purpose of Key Man Insurance?
The purpose of key man insurance is to provide a financial buffer while the management team figures out the next moves. Some businesses have business continuity plans in place that help determine vital next steps after losing a key person. If your business does not, currently, it is a good idea to do so while investing in key man life insurance for your organization.
What does Key Man Insurance Cover?
Key man insurance covers the death or disability of an employee. It can be canceled or transferred to the person insured if they leave the company, allowing them to adapt the policy to their needs and pay their own premiums. Most organizations purchase key person insurance to protect themselves financially. Small businesses, especially, need to consider this type of policy if losing a specific employee would have an adverse impact on your profits and the perceived value of your organization to potential investors.
Types of Key Man Insurance
There are three types of key person insurance. Understanding the difference can help your business make informed decisions according to your unique circumstances and needs.
Term Life Insurance
Term life policies last for a specified amount of time and then expire. Because there is a clear and specific end date for this protection, these policies are often more affordable.
Whole Life Insurance
Also referred to as permanent life insurance has no expiration date. The coverage continues as long as your organization continues paying the premiums. Whole life insurance is more expensive, but the premiums are deposited into a savings account.
Disability Insurance
If a key person becomes disabled and is no longer able to perform their duties for your organization, key man insurance will pay the business.
Does My Business Need Key Man Insurance?
This is an important question for businesses to consider. If one employee or a select group of employees carries the weight of the business and is largely responsible for its growth and success, it is a good idea to consider this type of policy. Ask these questions when making your decision.
- How would the loss of a key employee affect your company’s brand or reputation?
- Is this individual responsible for the majority of the revenue and business for your organization?
- Do daily tasks and projects relate to this one individual? Would these tasks be difficult to accomplish without that individual?
- If the answer to any of these questions is yes, key person insurance might be a wise investment for your organization in the long term.
Cost of Key Man Insurance
Something to consider is that the value of an individual within your organization may change over time. This means you need the option to have flexible coverage that can evolve as the business relationship does. The cost is largely affected by the amount of coverage you need to protect your business from this employee’s loss. Essentially you want enough coverage to protect your business profits if that person were to die or become disabled suddenly.
Other considerations that impact the cost of key man insurance include the following:
- Type of policy and amount of coverage (for instance, whole life protection costs more than term life protection).
- Coverage limits.
- Age, gender, and overall health of the key person being covered.
- The size and structure of your organization.
- The industry of your business.
As you can see, there is a lot to consider when it comes to insuring key staff. That is why you want to work with a team that understands your needs and different tools to help you limit how profoundly this loss impacts your business.
When your business loses a key employee, key person insurance can be a financial lifeline for your business. Arnold Insurance can help you determine how much cover your business needs and what options you may consider to better protect your business after losing a key person.