In every business, there are certain essential personnel whose knowledge and ability makes all the difference in terms of the organization’s success. The loss of one of these “key” men or women can have a huge financial impact on the company. A company could incur high costs to recruit a successor or to hire and train a replacement. The company could also experience financial loss resulting from a decreased ability to transact business until a suitable replacement can be found. To protect against this financial loss, smart companies purchase key man insurance.
What is key man insurance?
Key man insurance is a life insurance policy purchased by a company to protect against the death or incapacitation of a valuable and essential employee. The corporation owns the life insurance policy and is the beneficiary of the policy. When the employee dies, the policy pays out to the business and not to the family of the deceased.
Can any business buy key man insurance?
Any business of any size has the opportunity to purchase key man insurance. Key man insurance is routinely used by small partnerships because the death of a business owner could mean that the co-owners need to have sufficient funds to buy that person’s share of the organization.
However, large companies may also incur significant expenses, especially when a company loses an iconic figure. When your business is reliant upon any person’s unique talent, abilities, or reputation and you have concerns you could experience any financial loss upon his death, buying key man insurance is a smart choice.
Who should purchase key man insurance?
Key man insurance is owned by a company. Co-owners, a partnership or a corporation can purchase the insurance policy. It is common for a corporation or partnership to own multiple different key man policies on all of their top personnel.
Whose life is insured with key man insurance?
A company may buy an insurance policy on anyone whose death could cause the business to incur a financial loss. This could include an executive, a principal shareholder, a salesperson who is extremely effective at closing deals, a senior scientist, IT staff, or even a spokesperson. The person who is considered the “key man” is the one whose life is insured.
Why is key man life insurance especially important in a partnership?
While key man insurance is important for virtually any business, it can be especially important in partnerships and in small-closely held companies. When a partnership is formed, the co-owners should have a written buy-sell agreement in place specifying what happens to each partners’ share of the company upon death or disability.
The remaining partners should have the opportunity to buy the deceased or disabled partner’s ownership share. Without such a contract, the partner could give away or will his share to anyone he wants- which could mean that the remaining partners end up working with someone who they do not like.
When a clause gives the remaining partners the opportunity to buy the ownership interest of the deceased, they need to have money available to do so. Key man insurance can give the partnership enough funds to buy out relatives of the deceased partner or to buy out the disabled partner.
What types of losses can be covered with a key man policy?
When you buy a key man policy, you receive a lump sum death benefit upon the death or disability of the covered individual. You can use this money to offset any financial damage the death causes your organization. Money from the insurance payout can replace funds not earned due to lost profitability. The money can be used to recruit and train a replacement, to hire temporary help, to move forward with expansion efforts, or to do anything else the company believes is important to regaining momentum after the death of a key player.
How large should the policy be for key man life insurance?
The death benefit to be paid out upon the death of a “key man” should be sufficiently large enough to cover losses that occur as a result of the death. The specific amount of coverage that is required is going to vary based upon the value of the person being insured and the size of the company. Death benefits available for the purchase of a key man policy can range between $500,000 in coverage and $10 million in coverage.
How to buy key man policies
If your organization wants to protect itself financially from the potential losses associated with the death of important executives, you should begin to shop for key man policies.
First, make a list of the different people at your organization whose lives you need to ensure. Determine what each individual’s death could cost your business in terms of lost revenue and new expenditures. Then, shop for a key man insurance policy that will allow you to recover these losses in the form of the death benefit.
You should compare the costs of different policies, but also the extent of coverage. You may want to ensure that your business will be paid if your key man not only dies but also becomes too incapacitated to work. Be carefully comparing premiums and coverage, you can find the right key man policies for your organization.
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