What would happen to your company if a key employee unexpectedly passed away? You certainly don’t want to give it much thought. However, an unexpected death or extended absence could have devastating consequences for the success of your business. It would be best to buy a key person insurance policy from an insurance company to protect yourself from the worst-case situation.
Key Person Insurance
A key person insurance policy is a life insurance policy that a business buys on the life of an owner, a top executive, or another person they deem essential to the business. The company is the policy’s beneficiary and pays the premiums. This is often referred to as “key man (or “keyman”) insurance,” “key woman insurance,” and “business life insurance.”
Key person insurance provides a financial buffer if the sudden loss of a specific individual has a significant negative impact on the company’s operations. The death benefit generally buys the company time to hire a new employee or apply other methods to save (or close) the business.
The important person in a small business is usually the owner, the founders, or a key employee. The fundamental criterion is whether the person’s absence would cause the organization significant financial loss. If this is the case, key person insurance is something to consider.
Note: Key person insurance is not only offered as life insurance but also as disability insurance if the insured becomes disabled and unable to work.
Key Person Insurance Policy
A key person insurance policy is one that a company purchases to protect its most valuable employees. Consider life and critical illness insurance for those vital to your company’s performance, whether that’s the CEO, your top salesperson, or someone with a specialized skill set.
If any of these essential people were to die unexpectedly or become ill, a keyman insurance policy would safeguard your company from financial ruin. A lump sum is provided to the business and can cover profit losses, replacement staff, or loan repayments. It will keep you afloat throughout a difficult period and may mean the difference between survival and death.
To put it differently, a keyman policy, also known as a death-in-service policy, protects a company financially if a key employee dies or gets very ill.
Who you describe as a ‘key person’ will vary depending on your business, but it might be anyone you believe is critical to your company’s financial success.
If a keyman policyholder dies or becomes ill, your company will get a lump-sum payment to help offset the financial impact of losing that employee.
The concept of a ‘keyman’ depends on your company and the people you believe meet this description.
It is typically designated for owners or senior directors who contribute considerably to your company’s financial health.
It’s also frequently employed as a disguise for great salespeople.
It can, however, be used to cover individuals with specialized talents or responsibilities in the company who may be difficult to replace.
For instance, talented engineers working in a particular niche
Key Person Insurance Cost
The size, nature, and function of the company, as well as the role of the key individual, all affect the amount of insurance that a company needs. It’s worth getting quotations on policies worth $100,000, $250,000, $500,000, $750,000, and $1 million and comparing the costs.
The cost will also determine whether the corporation purchases term or permanent life coverage. Term life insurance is almost always much less expensive.
Furthermore, the cost of the coverage will vary depending on some criteria. These include the key person’s health, gender, age, the type of insurance, the amount of coverage, the type of organization, the structure, and the industry in which it operates.
Best Key Person Insurance
Purchasing key person insurance is identical to purchasing individual life insurance, and the market is flooded with key person insurance providers. I analyzed more than a dozen carriers and assessed each based on policy options, pricing, available riders, simplicity of use, and financial strength to help you pick the top keyman insurance company.
#1. Lincoln Financial
In general, Lincoln Financial is the best overall because it provides high-limit, comprehensive key-person insurance coverage for employees and executives. Lincoln Financial’s extensive offerings, significant coverage limits, excellent financial stability, and decades of experience in the life insurance sector led me to conclude that they are the best overall supplier of key person insurance.
Overall, Lincoln Financial provides key person insurance policies in terms of term life insurance, universal life insurance, indexed universal life insurance, and variable universal life insurance. Numerous riders can be added to any permanent life insurance policy, including a change of insured rider and a total disability rider.
When the insured individual dies, the death benefit from Lincoln Financial can be used to supplement business income, pay off loans, and fund company transitions. If the business continues to operate, the revenues can also be used to recruit and train a replacement.
#2. AIG Direct
AIG Direct is the #1 option for startups looking for key-person insurance. The provider provides affordable term and permanent life insurance protection with adaptable policies that change your coverage as your company expands.
Term life insurance policies from AIG Direct offer coverage of up to $2 million and term lengths of up to 30 years in five-year increments. AIG Direct also provides whole life insurance, accidental death insurance, permanent life insurance, and riders for specialist protection if you’re searching for long-term security.
Use the online tools AIG Direct provides if your company is considering obtaining life insurance for the first time to learn more about what to anticipate throughout the application process, how the medical examination works, how to determine your coverage requirements and other topics.
#3. Guardian
Guardian Life Insurance is the best key person insurance company for disability insurance, according to an Investopedia analysis. The company provides short- and long-term disability insurance policies for business owners, including personal income protection, covering ordinary business expenses, business loan protection, and consolidation. A non-cancelable rider, guaranteed-renewable rider, residual benefits rider, and future benefits growth rider are also available from Guardian.
Individual disability insurance coverage and supplemental insurance policies are available from Guardian. If your company presently provides disability insurance as an employee perk, an additional policy can boost the coverage limits for essential executives and high-earners.
Complete the free online form to receive a key person disability insurance quote from Guardian. You can also use the coverage calculator to determine how much disability insurance you need for your key employees based on age, profession, health history, and salary.
#4. Mutual of Omaha
If you need term life insurance for a business owner or executive, Mutual of Omaha is the best key person insurance company. Not only are the plans inexpensive, but you can tailor the coverage limits to your company’s specific needs and hazards. Mutual of Omaha’s term life insurance policies provide a fixed premium and guaranteed death benefit.
With Mutual of Omaha insurance, you can select a term limit of 10, 15, 20, or 30 years and $100,000 or more coverage. Mutual of Omaha will give policies to influential executives aged 18 to 80, making it an attractive choice for businesses with older personnel.
You can acquire a quotation from Mutual of Omaha by filling out an online form or contacting an agent directly. The company also provides a free coverage calculator to assist you in determining how much coverage is appropriate for your essential staff.
What is Key Person Insurance?
Key person insurance prevents companies from losing money if an employee becomes terminally or critically ill or dies. The funds can be used to identify a suitable substitute. Key person insurance can assist in keeping the business running.
What Is the Difference Between Key Person Insurance and Life Insurance?
Whereas Key Person Insurance is designed to reduce business losses, Relevant Life Cover protects relatives against the death of an employee by paying a tax-free cash lump sum to their family if they do pass away.
Is Key Person Insurance Expensive?
The insured person’s age and health, the desired level of coverage, and the type of policy are just a few factors that affect the price of key person insurance. Still, key person insurance is generally less expensive than other types of life insurance, such as whole life insurance. This is because key person insurance is meant to address a specific need, such as losing a key employee, and it lacks the investing aspects seen in other types of life insurance.
Who Is Eligible for Key Person Insurance?
A key person could be someone critical to your company’s day-to-day operations, such as a director, employee, or anyone whose talent, expertise, and experience influence revenue.
Is Key Man Insurance Worth It?
In the near term, it can protect your finances.
If losing a key employee means losing revenues, keyman insurance might help cover those expenses until you recover. It can also pay wages, replace staff, and even repay business debt.
What Are the Disadvantages of Key Person Insurance?
The most significant disadvantage is the additional costs associated with key-person life insurance and the likelihood that you will never use the coverage.
Is Key Person Life Insurance Deductible?
When a company buys Keyman Insurance to protect an employee, the premiums are often a tax-deductible business expense that qualifies for corporation tax relief. This is because the compensation is intended to compensate the company for losing a key employee rather than the individual.
Related: BASIC LIFE INSURANCE: What Is It & How Does It Work?
How Much Insurance Do You Need for a Key Man?
When taking out key person insurance for someone who generates revenue for a company, the conventional norm is to insure them for 20% of 2x the company’s yearly gross profit. It is more difficult to determine how much insurance is required for a critical but non-revenue-producing individual, such as a finance director.
What Is an Example of a Key Man Risk?
It’s about being ready for scenarios like Your CEO unexpectedly dies of a heart attack, leaving the company without a CEO. Due to a terrible vehicle accident, your top salesperson won’t be able to work for several months.
Conclusion
Key person insurance enables a company to continue operations in the event of the death of an individual vital to the company’s success. The death benefit to the company might cover various costs to guarantee the organization can withstand the unexpected loss of a critical employee. Choosing the correct key person insurance, policy quantity, and other elements is especially crucial for small enterprises and new startups.
- BUSINESS LIFE INSURANCE: Cost, Types & How It Work
- INSURANCE CARRIER: The Ultimate Guide
- WHOLE LIFE INSURANCE: What Is It & How Does It Work
- Cheap Small Business Insurance: Best of 2023
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