Christine Lacagnina has written thousands of insurance-based articles for TrustedChoice.com by authoring consumable, understandable content.
Reviewed by Jeffrey Green
Jeff Green has held a variety of sales and management roles at life insurance companies, Wall street firms, and distribution organizations over his 40-year career. He was previously Finra 7,24,66 registered and held life insurance licenses in multiple states. He is a graduate of Stony Brook University.
Updated августа 6, 2024
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Some businesses have an employee or two that they just couldn’t function without. These workers can be referred to as key persons. If a key person were to become permanently disabled or die, it could hurt your company in many ways. That’s why it’s so important to have the right coverage in place.
Fortunately, an independent insurance agent can help you find the right kind of key person insurance for your company. Even better, they’ll get you equipped with more than enough coverage long before the time comes to use it. But before we jump too far ahead, here’s a closer look at key person insurance.
In your business, you may have one or two key employees who help things function smoothly, and your company needs to be protected from the risk of losing them. Key person insurance, sometimes called key man insurance, covers one important person in your company, like the owner or CEO.
In small businesses, the key person might be the owner, but the term refers to any essential employee for a business of any size. These workers are crucial to the company. Your business could not properly function without them or their knowledge or skill set. The business is the beneficiary and is responsible for paying policy premiums and receives a payout if the key employee dies.
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Your company needs key person insurance if an essential worker dies suddenly or is incapacitated and unable to do their job. A key person policy can be one of the following:
Key person insurance policies cover the untimely death, disability, or sudden departure of a key person, but they can also provide financial support while the person is recovering from an illness or injury and cannot work in their previous capacity.
The policy's term is for a specified time period or until the person being insured is no longer with the company in the capacity of a key person. While it can be difficult to put a monetary value on a person and the work they do, these policies are often for a specific amount that's agreed upon when the policy is purchased.
Key person insurance is available from many different insurance companies, and the best way to find the right carrier for you is through working with an independent insurance agent. They know which insurance companies to recommend to meet your needs and can provide informed suggestions based on company reliability, rates, and more.
While many insurance companies could create a key person insurance policy for you, finding coverage could also depend on the area you live in. Here are a few top picks for key person coverage.
A Fortune 500 company, Lincoln Financial has been named the Best Life Insurance Company in the U.S. several times by World Finance magazine. The carrier has an "A-" rating from A.M. Best and has been around in the insurance industry since 1905. Their key person insurance offers the following benefits, according to the carrier's official website:
With such an extensive history and comprehensive key person coverage, it's certainly worth discussing with your independent insurance agent to determine whether Lincoln Financial is the right carrier to meet your business's needs.
A key person policy can cover an extended period after a key person is incapacitated and unable to work or dies unexpectedly. The policy can be used to provide temporary staff for your company or to hire and train a replacement. The key man policy can also be used to make up for a temporary loss of profits due to the loss of an important staff member.
Another use for key person insurance is as a guarantee for business loans. Additionally, the policy can be put toward shareholdings or partnership interests. For taxation purposes, the policy can be used to claim a deduction on business taxes under the category of business expenses.
The costs of losing an important member and leader of your business can be devastating. Without a business owner or key leaders, your company risks folding or going downhill. Key person insurance ensures that your company will be protected after a key person’s death or severe injury so you can recover from the loss.
Key person insurance can help your business cover future hiring or training a replacement for the lost key person. It also allows lost profits to be recovered during this time.
The payout from the policy goes directly to your business. Payouts from losing a key person can also be used to cover closing costs, investor payoffs, and severance pay for workers if your business closes.
Key person insurance has many benefits and many coverage areas. The main ways in which key person insurance protects your company are as follows:
An independent insurance agent can further explain how key person insurance operates and how it could benefit your business.
Key person life insurance helps a business ensure that they can financially recover in the event of the loss of their top-performing employee. The death benefit received by the business from a key person life insurance policy can be used in the following ways:
An independent insurance agent can further explain the numerous benefits of key person life insurance, and which apply to your specific business.
There are several instances when getting key person insurance would make sense for your business. Some of the most common include:
An independent insurance agent can further explain the many cases in which having key person insurance would make sense for your business.
Small businesses often have the most to lose regarding key staff members. If your small business loses its leader or another important person, there’s a chance that the company will close its doors for good. These irreplaceable workers are the most important to take out key-person policies on.
However, if you're a business owner who runs your business alone, you won’t need key person insurance. In this case, your regular life insurance policy will be enough to cover you in case anything should happen unexpectedly.
That depends because there's no specific formula for determining the monetary value of a key employee. To determine how much coverage you'll need, you should evaluate the financial losses that could result in your business from that key employee's death or disability, or other loss.
You'll need enough coverage to replace a key person's sales income if you lose them, as well as to cover costs of the hiring and training process for their replacement. An independent insurance agent can greatly assist you in calculating how much coverage you should get for your business.
Key person insurance provides many crucial benefits for businesses when they lose an essential worker, but they can't cover all causes of loss. Common exclusions under key person insurance are:
If you're concerned about key person insurance exclusions, speak with an independent insurance agent.
Life insurance and disability insurance are the two main types of key person coverage. Life insurance for your business can be purchased as a term, permanent, or return of premium policy.
An independent insurance agent can recommend the type of key person insurance that would work best for your specific business.
Often, the business will pay the premiums for key person insurance and is, therefore, the designated beneficiary if the key employee dies. However, the key employee must provide written consent to the business. In order for the key employee's family to receive a death benefit, they'd need to purchase a personal life insurance policy.
It's helpful to consider real examples of how key person insurance could operate in a business when shopping for your own policy. Check out some hypothetical scenarios and how key person insurance would work in each case.
An independent insurance agent can provide even more examples of how key person insurance could benefit your company.
The cost of your key person coverage will vary based on several factors, and it can range from as little as about $100 per month or $1,000 per year up to $1,000 per month or even more.
The cost of your key person coverage will vary based on several factors, and it can range from as little as about $100 per month or $1,000 per year up to $1,000 per month or even more.
These factors will influence the cost of your coverage:
Riskier professions typically come with a higher cost of key person insurance due to the increased risk of death or injury to the employee. An independent insurance agent can help find exact quotes for key person insurance in your area.
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