What Is Key Man Insurance?
Key man insurance is a life insurance policy held by a business to cover the life of a vital employee. You might also hear it referred to as “key employee life insurance” or “key person insurance.”
What defines a “vital” employee? Aren’t all employees important? Of course they are. But some have specialized knowledge, skills, contacts, or business relationships that would be incredibly difficult – if not impossible – to replace.
If that key employee were to pass away, the life insurance policy would pay a death benefit to the policy owner (either the business, a trust, or the business owner). That money would cover the cost of finding and training a replacement, and running the business without their expertise in the meantime.
Most key man policies are purchased by small-to-medium-sized businesses that simply don’t have the cash on hand to find and train a replacement for a key employee.
Wait—A Business Can Own Life Insurance?
Absolutely! And businesses don’t just use life insurance to protect the organization against the loss of key employees. Businesses frequently use life insurance as an employee benefit, and to fund buy-sell arrangements in a tax-advantaged manner.
Who Qualifies as a Key Man?
The qualifications of a key man or woman depend on your company (and your discretion). As a business owner, it’s up to you to know who in your organization justifies the coverage. In general, a key employee possesses skills, knowledge, contacts, and/or relationships that are crucial for keeping your business running and that would be costly or difficult to replace.
Types of Key Man Policies
Because a key man policy is a life insurance policy, you can buy any type of coverage that a family or individual can buy. So which type is best? Term life insurance covers your employee for a particular number of years (the policy’s “term”). This type of policy is appealing because your employee’s tenure is expected to end by retirement age. Plus, because there’s a time limit, it’s usually the most affordable type of policy. You can select terms ranging from one year to 30 years.
However, cash value life insurance is also appealing because it can be liquidated in the event that the key man or woman leaves your employment. Part of each premium payment you make funds a cash value account that earns interest over time. You can use that cash to help support your business. A cash value policy costs a little more than a term policy, but depending on your business’s needs, having that extra resource may come in handy a few years down the road.
What If a Key Employee Leaves?
Depending on the policy you buy, key man life insurance can provide needed funds even without the death of the insured. Specifically, a cash value life insurance policy builds equity (from your premiums and from interest) for as long as you pay into it. You can liquidate the cash value insurance policy at any time, for any reason. The amount of equity your policy builds will probably be much lower than the policy’s death benefit, however, so beware and plan accordingly.
Ready to Get Started?
To get a free quote for a term life policy, click here to use our quoter. Need help or want a free, personal consultation before deciding which type of key man policy is right for your business? Give us a call today at 916-773-3800.