3 Ways Key Person Life Insurance Can Save a Company from Losses

Key person insurance or key man insurance is a life insurance policy taken out on an executive team member of a business. The business would be the beneficiary and would also pay the premiums.


key person life insurance

What is key person insurance 

3 Ways Key Person Life Insurance Can Save a Company from Losses 1According to Wikipedia, Key person insurance, also called keyman insurance, is an important form of business insurance. There is no legal definition of “key person insurance”. In general, it can be described as an insurance policy taken out by a business to compensate that business for financial losses that would arise from the death or extended incapacity of an important member of the business. To put it simply, key person insurance is a standard life insurance or trauma insurance policy that is used for business succession or business protection purposes.

The policy’s term does not extend beyond the period of the key person’s usefulness to the business. Key person policies are usually owned by the business and the aim is to compensate the business for losses incurred with the loss of a key income generator and facilitate business continuity. Key person insurance does not indemnify the actual losses incurred but compensates with a fixed monetary sum as specified in the insurance policy.[1]

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What is the purpose of key person insurance

what is the purpose of key person insuranceThe main goal is to protect the company’s interest and compensate for the losses once a key member of the business suddenly dies. It will not cover the company’s entire financial loss, but it will give the fixed amount stated within the policy. Therefore, the company has the right to apply for coverage that they think is worthy of a key person’s life plan.  

Employers usually want to offset all the costs involved in:

  • the recruitment process, hiring, and training
  • the replacement of loss profit of the company until the training of the successor is done
  • the payment for all debts 

Moreover, the money from life coverage can also be used to buy shares owned by the company’s deceased member through a buy-sell agreement. Also, some companies generously give it to the deceased family as a perk of their trusted employees in case of the key person’s demise. 

The determining process of the key employee is vital. Hence, it is good if the company will establish set guidelines to find out who are their key employees. Also, if an employee has a database of clients and attracts a considerable amount of profit to the company, they are worthy of insurance. Another reason is if the employee’s work significantly impacts the business, and their loss will cause massive damage to the business. 

The following are ways of how a key person life insurance policy can save your business.

  1. Recruitment Process and Training of Replacement

Just like any other life insurance coverage, it is tax-free. Hence, it can help fund the recruitment process and the training of the key person’s successor. It can also be used to increase the salary of the replacement as he or she may have a higher-level skill than the other one. The company should consider the hiring process and the training of the replacement when getting this insurance. 

  1. Replacement of Profit

Aside from death, an accident can make a key person unable to perform their duties within the company. Therefore, it will result in a loss of profit for the business. Most companies nowadays insured their buildings and other tangible assets, but they forget their employees’ most important assets. If a key employee becomes incapacitated or died, the business will suffer from loss of profit and other expenses. The good thing is the fact that it is tax-free.

  1. Payment for Debt

It might affect the company’s credibility as creditors and lenders may not trust your company after the death of a key person. The benefit that the business can get is essential for continuous cash flow and keeps banks and other lending institutions from foreclosing loans, credit lines, and raising interest rates. Therefore, having insurance can also increase clients’ and employees’ trust regarding the stability of the company. 

Key man insurance vs life insurance

key man insurance vs life insuranceAlmost all business invests in the workforce as it is one of the keys to a successful and lasting business. The most trusted and reliable employee in the company is, most of the time, called a key person. A key-person is a vital asset to the company. Furthermore, he or she has all the skills and knowledge that the company needs. The contribution of the key person to the company’s success is valuable. 

However, unfortunate events can happen anytime that can make a key person unable to fulfill their duties in the company. When it happens, there are negative effects on the company, but measures can be done to avoid damages.

Key man life insurance differs from other life insurance policies in that the business is both the owner and the beneficiary of the policy. The employee essentially has no rights or participation in the policy

If a key person is precious to the company and an asset, it is worth getting life or health insurance. It is a key person life insurance policy that can safeguard the company in case of unforeseen events. A loss of a person that is vital for the company means loss of income.

How Can Key Person Life Insurance Help?

It is also known as the key man life insurance policy. It is a type of life plan that a company can purchase on behalf of their employee. The best thing about getting one is that it can shoulder possible financial losses from the demise or incapacity of a key person. Hence, it is a form of standard life coverage that is used by many companies for security purposes. 

A key-person could be the CEO, director, partner, salesperson, manager, or someone with special skills needed by the company. If you think that a person is significant to the company, then the organization can choose to acquire a key life policy for him or her. For instance, a small business can get coverage for their owner, founder, or key employee. Actually, there is no limit on how many employees you can enroll in the policy. It is true as long as the company has the capability to pay for the monthly premium. 

If you cannot decide on the key person, you can take a look at your business and point out people who are irreplaceable for the company. 

Key person life insurance taxation

If you are familiar with the traditional individual life plan, then the principle is the same. Once the insured dies, then the policy will pay a death benefit. If the business applies for the policy on behalf of the key person, then it is the business that has the right to collect all payout. 

Though key person life insurance premiums aren’t tax deductible, the proceeds of the policy are usually provided to the company free of income tax

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What type of key person life insurance policy to buy

key person life insurance policyA company can also choose from permanent or term life coverage. If the insurance’s main aim is to pay for a business loan and other payments that are temporary, then a term policy is a good choice. 

However, if the company wants a long term gain, permanent insurance is the best choice. This type of insurance has a death benefit plus investment through a cash value. Also, you can choose between whole and universal life.

Furthermore, a key person life insurance policy can also be applied together with other benefits like retirement benefits. If you want this kind of benefit for your employee, then permanent life coverage is valuable. In case of the sudden death of the insured, then the company can get the death benefit. However, if the insured reaches the retirement period, the insurance can turn into a retirement benefit. Another great option is to transfer the policy to the employee before retirement.

Key man insurance calculator

key man insurance calculatorInsurance companies typically base the amount of key person insurance needed on a multiple of five to seven times the employee’s current salary compensation and benefits. For example, using a multiple of five: $1,000,000 would be the amount of insurance needed for a key person with a salary package totaling $200,000.

How to get a key personnel insurance policy?

If the business is interested in acquiring a key person life insurance policy, it is important to know how much you need. It all depends on the particular needs of the business. The best advice is to acquire as much as the company can afford. Hence, think about how much money the company needs to survive the key person’s loss until it can recover from the loss.

Above all, the business should only acquire a policy that they can afford. Also, think of the short and long term goals right after the tragedy. If you already made up your mind about getting a Key person life insurance policy, then Coach B. life Insurance can guide your company. They can cater to the needs of all types of businesses, whether small or big companies. You can contact them at 1-800-342-1537, and an expert agent will be glad to help you.

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About Coach B.

After starting his financial career with Phoenix Home Life Insurance Company back in 1992, Scott decided he wanted to provide people with an easier and more enjoyable way to buy life insurance. That was the start of Coach B. Life Insurance, whose mission is to be transparent, honest, and helpful to customers — without ever bugging or pushing them.

In the years since then, he has worked tirelessly to improve the process of shopping for insurance. His goal is to make sure that everyone who comes to Coach B. — whether they end up buying a policy or not — has the best possible experience.

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