Key Man Life Insurance
Key man or key person insurance protects your company in the event of a sudden loss of a key executive or employee which would have a negative effect on the company. The insurance payout following the death of this person protects your company's solvency. Protecting your company from such a potential loss makes good business sense and is often required by lenders or investors to protect their loans and investments.
Key person insurance is typically written as a term life insurance policy since the company only needs the coverage until the executive or employee retires. The company typically owns the policy, pays the premiums, and is the beneficiary. The policy may be written to allow the benefits to be converted into a permanent insurance policy and transferred to the executive or employee as a retirement benefit upon their retirement.
The insurance company issuing the key man policy may require the board of directors to pass a resolution stating the purpose of the policy. The amount of insurance coverage a company can purchase will be limited to the company’s realistic risk of loss.
For example, a startup company with no revenue will likely not be allowed to insure their CEO for $5 million. The need must be justified by a demonstrated risk of loss. Additionally, the key executive or employee must agree to the company purchasing insurance on his or her life.
A key man / key person insurance policy could be the difference between your company continuing uninterrupted operations and having to shut its doors. Losing an executive, CEO, business partner, chief scientist, can be harmful to your business in multiple ways.
The insurance policy is obtained to provide coverage to offset the costs associated with such a loss. The losses may include the immediate loss of profits or revenue and/or the company’s costs of hiring and training temporary or permanent replacements.
Proceeds from the key man or key person insurance benefits may also be used by the company to buy out the insured person's shares or interest in the company or to recruit a replacement executive or employee.
Premiums for key man or key person insurance vary depending on the amount of coverage, the age, physical condition, and health history of the insured. Your company's financial well being will depend on you selecting the best insurance policy for your specific circumstances.
Before purchasing key man or key person life insurance consult with a professional business insurance broker. An experienced broker will be able to help you create a business continuation plan which will assist in determining the amount of the policy your company will need.
Paying key man insurance premiums may seem like a financial burden, especially if you are a startup company. However, the question you must ask yourself is can your company survive financially if you do not have insurance coverage in the event of the loss of a partner, key executive, or employee?