Key Man Insurance – Key Person Insurance – Do You Need it?

Written by Life-Wealth-Win

Key Man insurance, or key person insurance, is a life insurance policy on an individual, who is a key person in the business. This person is typically the key to the businesses success. If you are a small business, the key person would be you, as the owner. Often, the founder of the business or occasionally an extra employee or two may also be considered key persons in the business.business.

According to survey information gathered by the National Association of Insurance Commissioners (NAIC), 71% of small business owners say they are at risk and “very dependent” on one or two key people for the success of their business. Only 22% of the companies in the survey by the NAIC had any key person life insurance for the employees they considered indispensable.

Most businesses at great risk should a key employee die unexpectedly.

Do I need key person insurance?

Many businesses need Key Man insurance. However, a lot of businesses do not have key man insurance. There are many reasons for this, but much of the reason probably lies in the chaotic nature of most growing businesses.

Most businesses are busy trying to increase sales, collect payments, pay bills, find new business, manage payroll, hire people, deal with complaints, and attend to the hundreds of other things that happen throughout the day when you own and operate a business.

Key person insurance is often one extra thing that does not get handled or purchased in a timely manner.

Key man insurance is often not considered urgent until it is urgent…and by then, it is too late! The wrong time to think about key man insurance is just after a  key person has died.

Who are key persons in a business?

  • Corporate Officer
  • Senior Manager
  • Sales leader
  • Technical expert
  • Credentialed specialist

How does key man insurance work?

A company or business entity will purchase a life insurance policy on an owner, founder, or another key employee, and pay the premiums on the life insurance policy. The company is the beneficiary of the life insurance policy. If the insured person dies unexpectedly, the company will receive the proceeds from the insurance policy payoff.

Why is key man insurance important?

The main purpose of key man insurance is to help a company survive the financial and leadership loss that occurs when a key person in the business dies unexpectedly.

Why buy key man insurance?

The main purpose of key man insurance is to help a company survive the financial and leadership loss that occurs when a key person in the business dies unexpectedly.

How can the company use the insurance proceeds?

The company can use the insurance money to pay for expenses and other financial needs until it can find the right person to operate the business.

The company can also use the insurance money to support the business in these ways:

  • Replace lost profits
  • Pay off any outstanding debts
  • Distribute money to people who have a financial interest in the company
  • Pay severance packages to affected employees
  • Pay survivorship benefits
  • Purchase company stock from the deceased employee’s estate
  • To close the company in a structured and organized manner
  • Recruiting, hiring and training a new employee(s)
Key man insurance gives a company the option to continue operating the business, rather than to shut the business down. It is a significant safety net to protect the company from almost certain bankruptcy.

Do all companies need key man insurance?

No, they do not! If your company has no employees or other people who rely on the company then key man insurance is not needed. Key person life insurance is strictly a business life insurance policy.

Often, banks and other lending institutions will require business related life insurance policies when money is loaned to the business. That way, when a key person dies unexpectedly, the money they have invested in the company will be protected.

If the business owner, founder, or other key employees need life insurance for their families, they should purchase their own personal life insurance policies.

How much key person insurance does a business need?

One of the primary questions to ask yourself as a business professional is “How much money will my business need to receive to survive until it can replace the key person, founder, or other key employees.” It may be $150,000, $300,000, $750,000, or even $1 million or more.

Just purchase a policy that fits the company’s budget and addresses all short-term financial obligations if an unexpected death occurs.

Each business is unique in its needs for key man insurance. A good rule of thumb is to get as much insurance as the business can afford.

What kind of life insurance is best for key person insurance?

One of the primary questions to ask yourself as a business professional is “How much money will my business need to receive to survive until it can replace the key person, founder, or other key employees.” It may be $150,000, $300,000, $750,000, or even $1 million or more.

Just purchase a policy that fits the company’s budget and addresses all short-term financial obligations if an unexpected death occurs.

The key person being insured must provide written consent for the company to own a life insurance policy on him/her.

Many lenders to businesses require a business owns key person insurance to protect their loans and financial investment in a company.

What are the tax implications of key person insurance?

Life insurance premiums paid on a key employee by a company do not qualify as a deductible business operating expense. The death benefit proceeds, as with other life insurance policies, are received by the company on a tax-free basis.

Here is an example of how a key man life insurance policy works:

John started an air-conditioning repair company four years ago. It started out as a one-man operation, but John was talented at what he did, he treated his customers fairly, and his customers rewarded him with frequent referrals.

In a matter of four years, John had grown the company to 15 employees. All employees relied on John to manage the business, customers, and new business acquisitions, so the company could continue to thrive, profit, and grow.

Without John, the company would be at risk of closing its doors and not being able to operate. The business was making lots of money, profit margins were great, but if John died, the business would suffer terribly.

Without John, the company would be at risk of closing its doors and not being able to operate.

John was driving out to meet some new clients for a job on a 60 unit apartment complex. It would be a very lucrative contract that John had negotiated because of past business relationships. John was killed in head-on automobile accident on his way to this business meeting.

As luck would have it, or perhaps better said, as bad luck would have it…

Word quickly got back to all employees in the company. Then the numbness that follows the unexpected death of a key leader quickly set in. In the coming weeks and months, John’s company would experience a significant financial loss (both in new business revenue and with servicing the existing business’s customers).

It could have turned out much worse if John had not been such a responsible leader.

John had invested so much time and money into his business over the years he knew he had to protect the customers who had helped him become so successful. He had a responsibility to all his employees to make sure that, if he died, the business would continue to function until a replacement for him could be found.

Two years before John’s death, he had purchased a $2 million key man insurance policy. After John’s death, the insurance company paid out the $2 million to John’s company. John’s company could then pay off vendors, pay employee payroll, and hire an executive recruitment company to find a replacement for John so that the company could stay in business.

The $2 million key person insurance policy that John purchased made sure his company could safely operate and remain in business for the period of one year.

There is a reason John’s business has grown and thrived in the last four years; it was because John was a masterful owner and business person. John also understood he had a legacy to protect if he died unexpectedly. That is why John was responsible enough to purchase a key person life insurance policy to protect his business, employees, and customers.


Life-Wealth-Win Life Insurance and Wealth Services would love to help you get your loved ones, family, and business protected! Call us or get your free life insurance estimate by clicking the link below.

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