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Last Updated on 23 July 2018

Why Your Company Should Consider Key Man Life Insurance


If you lost a key employee in your business, how much money would you lose? How much time would you need to replace them? Would your business take a hit? Would it even survive? Many growing business owners, in particular, may have these questions in mind.

Key man insurance (also called key person insurance) is a life insurance policy businesses can take out on their employees, should a ‘key person’ pass away, become ill or injured, leaving them unable to work.

In many businesses, certain executives and employees are virtually irreplaceable. If something happens to them, the business will suffer financially if it can manage to stay afloat at all.

This is where key man life insurance comes into play. It gives companies the ability to purchase life insurance on employees in case the unthinkable happens.

Key Points
  • Key man insurance allows companies to take out life insurance plans on their executives and employees.
  • In the event of their death, illness or injury, leaving them unable to work, the company will receive financial compensation.
  • A key man insurance plan gives a business enough funds to stay afloat as they pay their loans, replace a deceased employee, retain clients, and buy shares of the company back.

How Does it Work?

First, a business purchases a key man life insurance policy from an insurer. They can choose whether they want to cover trauma, life, or both. After that, the business pays the premiums on the plan and become the beneficiary.

If anything happens to the employee, manager, or partner whose life is insured, the business receives a lump-sum payment.

Key man life insurance works almost the same way as regular life insurance. The only difference is the cost and the beneficiary of the policy.

Most of the time, individuals pay their life insurance premiums and are their own beneficiaries. If they suffer a severe injury or diagnosis, they receive the payment. If they die, the plan transfers to their spouse, children or someone else of their choosing.

With a key man policy, it’s the injured or deceased party’s company that receives the payout rather than their family.

Who Should Purchase Key Man Life Insurance?

Any business owner can benefit from having a key man life insurance plan on one or a group of employees.

There are a few positions in almost any company that are incredibly difficult to fill. Once you have the right man or woman in place, losing them to injury, illness or death could cause the business to come to a screeching halt.

No business is big enough to be impervious to the unexpected loss of a key contributor, but small and medium-sized companies are particularly vulnerable.

These companies rely on their executives and owners more than large businesses, since they generally have less staff.

These top-level positions are usually occupied by people who have been with the company since the beginning. You can’t replace this kind of knowledge and experience with a simple job posting.

What Are the Benefits of Key Man Life Insurance?

There are numerous benefits of key man life insurance for a company. The premiums are relatively cheap as well, and you can deduct them as an expense on your taxes.

Key man life insurance gives business owners peace of mind that an insurer will cover their most important assets: people.

Upon severe injury or death of an important person in the company, the life insurance money a business receives can be used for the following:

Securing Funding with Key Man Life Insurance

Key man life insurance can benefit your company even if you never have to make a claim.

Businesses who are searching for funding through investments and loans will be in a much better negotiating position if they have key man life insurance on their most important staff.

Investors and lenders want to be sure that their money is safe. The death or permanent disablement of a company leader can spell chaos, especially if there is no key man insurance policy in place.

The company can also use a key man life insurance policy as collateral for a loan. If an insured employee dies, the lender can recover the remaining balance through the insurance policy. The lender will be considered the primary beneficiary, whereas the company will be considered a secondary beneficiary. Therefore, if there are any benefits remaining after the lender has recovered their loan, the company will receive the remaining cash benefit.

Lastly, if the loan has been paid off before the unforeseen death/illness/injury of an insured employee, the lender will no longer be the primary beneficiary. In this case, the company will receive the full cash benefit.

Establishing Control of the Company

If one of the primary shareholders of a company dies, the shares often transfer to their spouse or child. They might have no knowledge or interest in running the business with the other partners, and decide to sell.

If you don’t have enough funds to buy back your partner’s shares, you could end up working with or being controlled by an unpredictable third party.

This element is part of the reason why investors like to know you have a plan in place in case the worst happens.

A key man policy will give you the funds to repurchase your company’s shares from your partner’s family. You won’t have to worry about negotiating against an outside party who might pay more.

Finding a Replacement

You’ll eventually have to replace the partner or employee you lost, and this can be extremely costly.

You’ll likely have to pay a recruiting firm to search for you. Once you negotiate salary and hire the right person, you still need to teach them how the business runs and allow them time to get settled.

The whole process can cost hundreds of thousands of dollars. When you combine this with the loss of revenue you experience when an executive dies, the price is enough to stop a growing business in its tracks.

Paying the Company’s Debts

As we briefly covered above, you can use a key man insurance plan as collateral on your loans. If a primary figure in the company dies, the policy will cover the loans and give you some additional money to keep your company stable.

You can also receive monthly payouts on one of these key man policies.

Doing so will supplement the bulk of the income you might lose while you’re searching for a replacement and trying to keep customers happy.

Keeping Employees Happy

Losing a leading figure in your company means instability. Your employees will notice this and might start looking for other jobs, so they don’t fall victim to potential layoffs.

Key man policies will give you enough funds to retain many of your crucial employees. You can instill confidence in them, in regards to their job security and the security of your business.

Retaining Clients

Clients are even warier when a leader of the company dies. There’s a substantial chance they’ll take their business elsewhere.

If one of your partners has personal relationships with a string of clients, it will take a while to earn their trust again. Key man insurance gives you enough funds to give your remaining clients gifts and other incentives to stick with you.

Choosing Key Man Life Insurance

When you’re looking for a key man insurance policy, you need to ensure all bases are covered.

Purchase a policy for everyone you consider irreplaceable. That way, if the worst happens, your business will be able to stay afloat.

Death isn’t the only tragedy for which you need to plan. If a key figure injures themselves or receives a diagnosis that forces them out of work, the financial implication will be just as grave.

If you can, purchase a plan with a couple of employees or partners that includes permanent injury cover. Then, shop for different policies and compare their premiums and coverage options.

In many ways, shopping for key man insurance is very similar to regular life insurance.

Make sure the plan covers the significant injuries or deaths that could impact your business – the same way you would if you were buying life insurance for your family.

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