Key Man Life Insurance
Most firms have what’s referred to as a “Key Man”—the one architect upon whom the success of the business depends. In fact, for some companies, the business could not survive if one or more key individuals suddenly passed or were injured and could not work. In many cases, this “Key Man” is the firm’s owner or partner. Alternatively, it can be a majority stockholder, but in either case, the death of this “Key” person could put the firm in financial ruin.
Businesses that recognize the negative impact this circumstance could have, often protect themselves from this type of disaster by purchasing a key-person life insurance policy. Not only does it make good business sense, but it may be required in some cases.
There are a number of situations where this type of insurance protection adds value to the firm, such as:
- The continuation of the business is dependent largely on one or two principals such that if one of these key individuals could not work or died, the funds from this policy would allow the enterprise to survive the financial impact while new management was recruited. A Life Insurance policy for a “Key Person” would equip the beneficiary (the firm) with the financial support needed to secure a suitable replacement. Additionally, Disability Insurance should also be considered. According to a statistic cited on the Business Toolbox website, “…between the ages of 30-65, it is much more likely that a person will become disabled than die…disability insurance should play a role in any key man insurance decisions.”*
- The business wants to secure a loan. Many lenders require key man insurance with the firm or lender named as beneficiary because without the key employee the firm may be unable to repay the loan.
- A disproportionate amount of revenue is generated by one or two individuals. In the case of permanent disability or death, it may take too much time for other individuals to reach this level of revenue or replacements to be in place.
- The firm changes its business structure via mergers, acquisitions or IPO’s when key executives are usually covered with a key man policy.
The following checklist** of key issues should be reviewed to analyze key person policy terms:
- Is the dollar amount of the coverage sufficient?
- Is the insurer financially strong?
- Are the premium payments competitive?
- Are the premiums fixed for the life of the policy?
- Are the proceeds payable to the company or to a surviving spouse?
Many circumstances indicate the need for key man insurance. It is important to work with your business advisers and accountants to determine which individuals are critical to the success of a profitable firm.
A popular tool used to fund a key man policy is Term Life Insurance. Term life is generally less expensive than a whole life (cash value) policy and serves the need to cover an employee for a specific “term” of time, usually up to a planned retirement age.
[…] admin wrote an interesting post today onHere’s a quick excerptMost firms have what’s referred to as a “Key Man”—the one architect upon whom the success of the business depends. In fact, for some companies, the business could not survive if one or more key individuals suddenly passed or were injured and could not work. In many cases, this “Key Man” is the firm’s owner or partner. Alternatively, it can be a majority stockholder, but in either case, the death of this “Key” person could put the firm in financial ruin. Businesses that recognize the negative impact this circumstance could have, often protect themselves from this type of disaster by purchasing a key-person life insurance policy. Not only does it make good business sense, but it may be required in some cases. There are a number of situations where this type of insurance protection adds value to the firm, such as: […]
[…] admin wrote an interesting post today on Key Man Life InsuranceHere’s a quick excerptA popular tool used to fund a key man policy is Term Life Insurance. Term life is generally less expensive than a whole life (cash value) policy and serves the need to cover an employee for a specific “term” of time, usually up to a … […]
[…] admin wrote an interesting post today on Key Man Life InsuranceHere’s a quick excerptA popular tool used to fund a key man policy is Term Life Insurance. Term life is generally less expensive than a whole life (cash value) policy and serves the need to cover an employee for a specific “term” of time, usually up to a … […]
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