As a business owner, you’re deeply invested in the commitment that your employees have to your company. In many cases there are probably several key individuals who play such an important role in your company that the loss of their services could be potentially devastating to your business. This is where key man insurance can be an important stop gap to help you recover if something happens to one of these critical employees.
In summary, key man insurance refers to coverage that protects your business in the event of an untimely disability or death of a top executive salesperson or business owner. This insurance gives peace of mind to the business owner as well as any shareholders in knowing that you have a financial support system if something happens to a critical employee. To compare quotes use our quoter or contact us directly.
If a key employee suffers a disability or passes away suddenly your company may be left in a lurch as far as managing that person’s account or carrying on the tasks that person handled on a daily basis. For the employees who provide essential support to your business, their sudden loss could be devastating for your company. It could even lead to the financial demise of the business entirely. This is why more and more business owners are considering key man insurance as an important protection against this potential outcome.
Many people make the mistake of assuming that key man insurance is just another form of life insurance. While life insurance is an essential component of a good key man insurance policy, disability insurance may also be equally important. In determining what policies you need for your particular company, make sure that you analyze all of the roles for individuals inside the business and determine the most appropriate course of action for selecting disability or life insurance policies for those individuals.
Does Your Business Have the Adequate Protection Necessary?
For many medium and small sized businesses, the success of the company is dependent upon a few top individuals who have a high level of skills, talents or experience. These key employees are essential for the short term and long term performance of the company. And loss of one of these individuals can be damaging for the company.
The solution to protecting your business against this potentially negative outcome is known as key man insurance. Key man insurance gives a financial support system to help stabilize your company during the period of transition after a key employee has been lost. When disability or death happens, the business may lose out on the critical management skills and talents of that employee. Decreased sales and productivity may follow for the weeks or months following the loss of this critical person, among other challenging outcomes.
You many also have to invest significant time and financial resources in finding an appropriate replacement. This could mean recruiting someone from the outside or investing in training for a person already working with your company. Regardless, this will be a period of transition and could be difficult if your company is experiencing financial losses in the short term because this key employee is no longer there.
Recognizing that you may need to incur significant recruitment or training costs in terms of time and money, key man insurance helps reduce the impact that your business experiences as a result of this critical loss. Key man insurance essentially protects you against this risk. You may consider purchasing several key man insurance policies if you have a number of people working for your company who provide vital support. While a small business may only need one keyman policy, a medium size business may require a few.
How Does the Policy Work?
Business owners and businesses regularly use disability insurance and life insurance to help guard against the risks associated with disability or death. A business can purchase policies on key employees to cover the amount of funds that it would take to replace this individual in the event of a disability or death. In most of these cases the cost associated with obtaining such a policy is relatively small in comparison with the potential benefit if you were to lose this employee due to a disability or death. The business is responsible for securing the policy on the life of the key employee. The business maintains ownership over the policy, pays the premiums to keep the policy active and is listed as the beneficiary in the event that the key employee passes away or becomes disabled.
Premium payments made by the company are usually not tax deductible, but the proceeds received from a key man insurance policy are usually free of income tax. Bear in mind that a key man insurance policy is designed to protect the business and not the key employee. This is why it is relatively common for an individual who is a key employee at a company to have both a personal life insurance policy to support his or her own beneficiaries, and a key man insurance policy purchased by the business to cover the cost of replacing that critical employee.
The employee should never be under the impression that a key man insurance policy is designed to support his or her beneficiaries. Make sure you clarify this anytime you initiate a new keyman insurance policy. These employees may want to carry individual policies on themselves as well. Having an independent insurance agency help you review all the needs of your employees in conjunction with evaluating potential keyman policies can be a good idea, as this gives you the opportunity to educate everyone in the office about the benefits of life insurance.
Policy Specifics
To determine the right policy for your company when you have a need for key man insurance, you may wish to speak directly with an independent insurance agency who can help you evaluate all of your risks and determine the most appropriate policy. Bearing in mind that premium payments are non-deductible for income tax purposes, there is no tax consequence to the insured employee unless you ultimately transfer ownership of the policy down the road.
You can use either a term life insurance policy or a permanent life insurance policy for this particular type of coverage. You may want to look for a product that offers some kind of business exchange rider in the event that you wish to change the name of the insured. This could be due to employee turnover. Key man life insurance provides critical help for a business who may suffer in the event that a key employee is disabled or passes away. Without this kind of coverage a business may find itself in financial jeopardy trying to adjust to business as usual after the loss of this essential employee.
Which Employees Warrant a Keyman Policy?
Take a step back and analyze the individuals currently working in your business. Who has superior sales skills? Who has the talent that is only necessary with years of experience or high end training? Who provides essential support that would be difficult to replace, given the current marketplace? All of these factors should be considered in determining whether you need a key man life insurance policy on one or more of the employees on your team. When used properly, key man life insurance gives a safety net to a business so that it may focus on grieving from the loss of a key employee and attempting to replace him/her through training someone else or recruiting an outside individual.
Many companies elect to use term life insurance as the policy choice for key man coverage because the premiums are very inexpensive compared with permanent coverage. Term life policies are typically available for periods between 10 and 30 years and the premiums will stay fixed over the course of the policy. Some businesses may opt to pay the higher premiums associated with universal or whole life insurance when it comes to a key man policy. One of the advantages of a permanent policy is the building of cash value as the premiums are paid. If the key person leaves the business to take another job or as a result of retirement, the company can recoup some of the premiums paid into the policy by accessing the cash value. Businesses could even retain the key man insurance after the insured employee leaves the company. Make sure you set aside time each year to review all the existing life insurance policies in order to determine what still suits your needs and what may need to be altered or replaced.
Benefits of Getting a Quote First
Getting a quote online however can reveal that permanent life insurance policies used for key man insurance can be significantly more expensive than term life. One common question faced by any business in this situation is attempting to determine how much insurance is necessary. The purchase of life insurance should be considered by any business looking to protect itself against a major loss of an important employee.
The amount of coverage could be determined by the amount of profit or revenue generated by this key person as a multiple of the employee’s compensation in order to value their worth, or as a direct cost of recruiting, hiring, interviewing or training a replacement. As a part of this process, you may also consider the potential contributions for the employee down the road of the business if he/she were to stay with the company.
Final Thoughts
In conclusion, it is important for any business that relies on the skills of several key individuals to evaluate the benefits of key man life insurance. If one of these individuals were to become disabled or passed away, the company could suffer significant losses in both the short and long term. When you know that this might happen to you, it’s important to understand your risks and take steps to address them appropriately. In conjunction with other plans, a life insurance policy may be an important part of that process.
Key man insurance is an important stopgap for guarding against these risks and giving you some peace of mind that you have the financial support to recruit and train a new individual to help fill this critical role.
The good news is you’re at the right place! Welcome to InsureChance! We’re an independent agency that shops around with all the companies on the market to get you the best policy at no extra cost to you. Key employee coverage also happens to be our specialty so if you have any questions give us a call at 888-492-1967 or hit the chat button below.
