Key man insurance
Key man insurance is a specialty insurance policy that protects important team members.
Life is full of surprises—twists and turns, ups, and downs. As a small business owner, you have to pray for the best and prepare for the worst.
Although no one likes to dwell upon death, as an employer, it’s your responsibility to consider what would happen to your business and its employees if you or a key employee of the company suddenly passed away.
Would it be able to continue on in your absence? Or would it collapse?
If you fear the latter, you should consider protecting your business and purchasing key man insurance, a special type of life insurance that covers business losses caused by the death of an irreplaceable member of the company. But how does key man insurance work, and what does the insurance carrier cover? We’ll answer all your questions below.
Key man insurance is a specialty life insurance policy that a company purchases on an important team member’s life (not exactly the person who has all of the keys, but they’re probably pretty important too). The business pays the policy premiums and acts as the beneficiary. Should that insured person die or experience a long-term disability, the business would then be compensated with an insurance payout by the insurer.
Almost every business has a couple of irreplaceable members, cornerstone players that everything else is built upon. But, take away those key people, and the business can come tumbling down like a house of cards.
For instance, a key person could be the owner, the founders, business partners, or invaluable employees. So, if you’re trying to determine who that person might be in your own organization, ask yourself the following:
This could be a famous chef, a starring actor, a world-famous plastic surgeon, or an adept software developer. Put simply, they’re an indispensable part of the business, and their absence would hinder the company’s ability to continue operating normally. This is why it’s wise to put key man insurance on those specific players.
Key man insurance works like a standard life insurance policy, except it’s not the individual paying the life insurance premiums and designating a beneficiary; rather, it’s the business. Policies vary, but the most common ones are:
If the key employee(s) designated by the company dies, the company would receive a death benefit. This would give the company breathing room to take any of the following actions:
Fundamentally, it acts as a safeguard that allows you to avoid immediately going into bankruptcy because you lost an all-star.
So, for instance, imagine a small but specialized tech company has a one-of-a-kind research scientist that is the head of the R&D team. For two decades, she’s the driving force behind all of their product development and the various patents the company has registered.
If she were to die, the gap on the team that’s now left vacant is too big to fill, which could significantly hinder the business’s ability to go on as usual. The leaders of the company would then have to scramble to find a suitable replacement (if one even existed). And, if they did, they’d likely be in high demand and hard to get.
A key man insurance policy taken out on this head researcher would give this business a monetary cushion and the breathing room needed to perform the search or make new arrangements.
In this case, it could be the difference between the company persevering or going bankrupt.
Key employee insurance covers several categories of loss. They include:
There are several factors that go into a key man insurance policy’s premiums, including the underwriting risk and the type of policy selected. Some are as low as a few hundred dollars per month, while others can be in the thousands of dollars. This price range is based on the following factors:
Typically, policies go on a 10-, 15-, and 20-year term, but they also offer year-to-year renewable terms.
Key man insurance is a specialized type of insurance policy that may be required for some small businesses and unnecessary for others. That said, there are other types of business insurance policies that are vital for your company to operate safely. Specifically, every small business should have at least general liability insurance and, in some cases, also professional liability insurance.
Now that you know what key man insurance is, perhaps you have someone in the company that you need a life policy for. We hope this guide helped answer all the questions you had regarding this specific, but extremely important insurance policy.