Key Man Insurance
Key man life insurance is a type of death and/or disability policy which businesses can purchase for irreplaceable employees. There are some employees whose loss would irreparably damage a business’s ability to function and others who would be difficult and expensive to replace. Key man life insurance pays a benefit to the business to defray the cost of hiring and training a new employee and to cover any business losses.
What Type of Businesses Need Key Man Insurance
While small and medium size companies are the most frequent purchasers of key man insurance, larger corporations also purchase policies to cover top executives. Partnerships should consider key man insurance since if one partner dies, the other partner may have to buy the other share of the business from any of the deceased heirs. Any business with an employee whose contribution to the company is crucial should strongly consider key man insurance.
Who Is A Key Man?
A key man can be any person in the company whose skills or expertise are necessary to the daily operation. Whether the person is a company executive, a salesman or a skilled worker, if the business would have difficulty replacing the person and functioning without him or her, that person is a key man. Key man insurance is life or disability insurance which pays benefits to the business if the employee dies or is disabled.
Disability Insurance on Key Employees
While many key man policies are life insurance policies, the business would face the same problems if a key employee became disabled. It is possible to purchase key man disability insurance which would cover the business’s expenses if the key person was unable to work, but did not die. Life insurance only pays benefits on the death of the insured person, but disability of a key person can be equally devastating to a business.
Term Life Key Man Insurance
Many companies choose term life key man insurance because the premiums for term life insurance are usually lower than those on whole life insurance. Key man insurance premiums are not tax deductible, but the benefits may not be taxed upon death depending on specific circumstances. Term life policies are available from 5 years to 30 years and once the policy is purchased, the premium remains fixed for the policy’s entirety.
Whole and Universal Life Key Man Insurance
Some businesses may choose to pay the higher premiums of whole or universal life insurance on key man insurance policies. The one advantage of these policies is that they build cash value as the premium is paid. If the key person leaves the business through retirement or to take another job, the business can recoup some of the premiums from the policy through the cash value. Businesses can retain key man insurance even after the insured employee leaves the company.
Survivorship Policies
Partnerships may elect to purchase a special type of key man policy called a survivorship life insurance policy. In survivorship policies, two people may be insured under one policy and the policy pays the surviving partner. Survivorship policies are usually less expensive than purchasing two separate term life insurance policies and work well for partnerships where the heirs of the deceased partner may make a claim on the business and need to be bought out.
Avoiding Death Benefit Taxes
Death benefits on key man insurance can currently be taxed unless the employee was notified in writing about the policy before it was issued, the employee gave the employer written consent to being insured under the policy, or the employee was notified in writing that the employer is the beneficiary of the policy. If these steps are not taken prior to the key man insurance policy being issued, the death benefit is taxable.
Lenders and Key Man Insurance
When small businesses are highly dependent on one or two key people, it may be difficult to get a business loan unless the lender is guaranteed that he will be paid back in the event of the death or disability of a key person. Lenders may refuse to extend a loan if the key person is not insured or in some cases, the lender or investor may buy a key man policy on the person in order to cover the cost of the loan if the key person dies or becomes disabled.
Key Man Insurance and Stock Buy Outs
Larger companies often offer top executives stock or stock options as part of their compensation package. If an executive with a large amount of stock should die, the asset would pass to his heirs and the company board of directors might have less control over the direction of the company. Key man insurance provides the funds for the company to buy back the stocks from the employee’s estate.
How Much Key Man Insurance Is Necessary?
The purchase of key man insurance should be included as part of any responsible business plan. The amount of revenue generated by the business is a consideration and the key person’s contribution to the company in the present and the future must be factored into the decision. Planning for future business growth includes buying enough key man insurance to cover future contributions the employee may make.
Life Insurance Quotes Online
As with any life insurance product, comparison shopping for key man insurance can save a company a substantial amount of money. TheLifeInsuranceQuote.com offers free, instant life insurance quotes online from the best life insurance companies in the U.S., helping consumers and business owners find and compare the best, cheap life insurance rates and coverage.
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