Key Man Life Insurance
Key man life insurance, also known as key man insurance or key person insurance is a type of business insurance. Basically, it is an insurance plan that can be obtained by businesses to compensate for insurable losses that can occur from either the policy holder’s extended incapability or unexpected demise.
The term of the key man life insurance will not go beyond the insured person’s or key man’s worth to the insured business. The goal of getting key person life insurance is to recompense the insured business for insurable losses in order to continue maintaining the business.
Key man life insurance will not be responsible for covering the business' actual losses, but will fully compensate with a fixed amount according to the policy.
Additional Uses of Key Man Life Insurance
It is a given that majority of investors or lenders are wary of investing or loaning their money for small businesses, most especially in cases where the brains and heart behind the business heavily relies on only one or two persons. More often than not, investors and lenders may say yes to an agreement if the key men or persons have key man life insurance coverage.
In this scenario, either the business or the investor purchases and pays for the premiums of the key man life insurance policy as stated in the agreement contract. If the investor is the purchaser, they are the ones who will be paid back in the event of an insurable loss, and not the business.
On the other hand, while the investor is secured, the business is not. In this context, it would be wise for the business owners to get a supplementary key man life insurance plan where the business is the beneficiary.
Who is the Key Man in a Key Man Life Insurance Plan?
Aside from investors and the business owners themselves, businesses should also consider taking out key man life insurance for key persons in their managing team. A business owner can get a key man insurance plan on the health or life of a worker whose job, knowledge, and general contribution to the business is exceptionally valuable. In this light, businesses should highly consider getting insurance coverage for the whole team.
Business owners benefit from key man life insurance because it can compensate unavoidable costs and losses. These include recruiting temporary workers or a successor in the case of an employee’s death, and other insurable losses like reduced work capability, which can be likely experienced by a business because of losing the key man.
Practically any employee can be the key man; be it the director, a project manager, a marketing person, or other lower ranked employees. Factors to include when choosing which ones to insure include their expertise and skills, as well as their personal contacts with the business suppliers and clients that affect a significant portion of the business profits.
How Much Key Man Life Insurance should you get?
When you decide to purchase key man life insurance coverage, you should place it in the context of your general business plan. To determine how much coverage your business needs, you should first determine the sum total of the business revenue.
You should also factor in how much business revenue is affected and generated by your candidate for the key man life insurance policy you plan to purchase. Likewise, you should calculate the rate at which your business and the candidate’s contribution can increase over time.
It is important to note that it is better to purchase key man life insurance plans in bulk, for different key persons, since additional insurance purchases at a later date may have higher insurance costs. In addition, you should factor in the following insurable losses that can be compensated when deciding how much coverage you should get.
- Losses directly associated with the extensive period of times when the key man can’t work, when hiring temporary employees are required, and for financing the hiring and training of a new employee in the key man's place.
- Coverage for protecting investor and shareholder interests in which they are the beneficiaries because they will be the ones paying for the premiums.
- Coverage for key persons directly in charge of guaranteeing banking facilities or business loans. In this case, the insurance policy should be commensurate to the guarantee's value.
- Coverage for protecting revenue. This can apply for offsetting various losses such as lost profit from potential sales, cancellation or holdup of a project involving the key man, loss of unique knowledge and skills, or lost expansion opportunity.
Key Man Life Insurance – Permanent Life or Term Life?
A key man life insurance policy can be purchased under permanent life insurance or term life insurance. With key man permanent life insurance, the coverage will be based on cash value which can be a significant asset to businesses since the cash reserve can be borrowed, like in instances where the business requires extra cash.
On the other hand, with key man term life insurance, pure insurance coverage is offered and without the option of a cash reserve or buildup. This is without a doubt more affordable in terms of paying off monthly premiums. With both key man insurance policy types however, there can be drawbacks if you do not choose and use them wisely.
With a permanent life insurance policy, repeated withdrawals from the cash reserve can greatly reduce or completely deplete the cash account, which can result in a reduced death benefit due to outstanding loans. With term life insurance, you should go with a plan that will be sufficient to cover the key man until he retires. If not, the insurance coverage will lapse even if the key man is still part of the business and you would have to take out a new policy because of it.
In this context, it would be very wise to choose reputable insurance providers that can help you get the best key man life insurance coverage for your business. Likewise, remember that insurance for your business’ physical assets will be useless if you lose your most vital assets, which are your employees. So in order to completely secure your business, getting key man life insurance coverage should be a must.
