Many companies have employees considered invaluable, often the heart of the business. These are people who work to support the business’s best interests and are often tasked with managing its most important tasks of it. Most importantly, they have unique skills that benefit the business, and without that person there, the company would struggle to find a replacement. Protecting against this risk is one of the benefits of key man insurance.
Purchasing insurance to minimize the financial impact of losing a core member of your business is a critical decision. In some cases, it defines what happens with the company going forward. Does your business actually need it?
What Is Key Man Insurance?
Key man insurance, also known as key person insurance, is a valuable asset. It is an insurance policy designed to provide a business with financial compensation if a covered, highly valued business professional dies while working for the business.
A business purposes key man life insurance for these specific individuals within the company – people that they see as critical to the operation and ongoing management of the business. The organization can purchase this policy for people who play important roles within the organization, such as owners, CEOs, or key management personnel. The policy is taken on individuals, and some companies need to obtain policies for more than one person.
It is often the case that key man insurance is taken out on the business founder or owner. Imagine if the founder of a company dies unexpectedly without a plan in place to replace that party. What would this cause to the company? Who would manage it? Would it be forced to shutter its operation because there is no leader at the helm?
How Does Key Man Insurance Actually Help with This, Though?
When key person life insurance is in place, and the covered party dies while working for the company, the policy will issue a payment to the company. It is very important to know that this insurance does not provide life insurance for the employee’s family – the business itself is the beneficiary of the policy. If the employee dies (or becomes disabled and unable to work), this insurance policy pays the listed benefit to the business.
What Does Key Man Insurance Cover?
Key man life insurance covers the death or disability of an employee. There are some key factors to consider with this insurance.
What is Key Man Insurance Good For?
It is the ideal tool for companies with very valuable employees and leaders who are vital to the company’s operation.
- This could be the owner or founder of the company.
- It could be those running the company, such as the CEO, CFO, or other executives.
- It typically covers people vital to the company and cannot be easily replaced.
- The company elects to obtain key man insurance based on the expected financial losses if this person leaves.
Key man insurance can help to cover the loss of the named party, whether that is from any of the following situations:
- The individual dies while the policy is in place.
- The individual becomes disabled according to the rules of the policy.
In most situations, it does not cover the employee’s termination or otherwise leaving the business. Rather, it is designed to provide financial support when there is an unexpected loss of an employee.
Another core component of these policies is that they are flexible. For example, the policy covers a single person but can be canceled or transferred to other people when the employee leaves the company.
In this way, it is possible for the business to adapt the policy to fit their needs on an ongoing basis. As long as the premiums continue to be paid, the policy will remain in place, covering the named party. More so, the policy can be canceled or transferred to the person insured if they leave the company allowing them to adapt the life insurance policy to their own needs, though they would then be responsible for paying their own premiums.
Your business may change over time, and that’s okay. With the use of this policy, you have more opportunities to be flexible with how it is used within the limits set by the organization.
Does My Business Need Key Man Insurance?
There are many reasons to consider key man insurance. Take a moment to consider what could happen within your business if a key employee was lost.
- Is there one or more people that are largely responsible for managing the company?
- How easy would it be to find a replacement for these individuals?
- What would happen if core employees become disabled, leaving the company unable to work with that person?
Next, consider what work would go into finding a key leader to replace that person. Would you need to do a significant amount of training to move someone up into that position? Or, would you have to be able to have the funds to pay the salary of a new person you hire to meet these needs?
Key man insurance helps to pay out a specific amount of money based on this loss. The company can then use those funds as they need to protect its future.
If you have one employee or a select group of employees that are largely responsible for the growth and success of the business, key man insurance could be a critical component of your business asset protection plan.
Finding the Right Policy Matters
When your business loses a key employee, key man life insurance can be a financial lifeline for your business. It could be critical to helping you to maintain operations.
Arnold Insurance can help you determine how much coverage your business needs and what options you may wish to consider to better protect your business after losing a key person. Contact us today to learn more about the financial tools we can offer you.