How To Buy Key Person Insurance
The process for buying key person insurance is generally the same as buying individual life insurance, with one major difference. In addition to underwriting the individual who is going to be insured, the business seeking insurance must also undergo underwriting.
The basic steps to buying key person life insurance are:
Who Needs Key Person Insurance
Businesses of all sizes can benefit from key person life insurance:
Start-ups: early and late-stage startups often have founders, CEOs, or a small group of key employees whose expertise is hard to replace. Buying key life insurance for start-ups can be more complicated during underwriting because the businessâs track record is not as established, so we recommend working closely with a licensed insurance agent from the very beginning.
Small or private businesses: from mom-and-pop stores to private practice law firms, small businesses typically have owners or partners who would be hard to replace either because of their reputation with clients or their involvement in day-to-day business operations. If the business has been around for a while, the financial underwriting process is fairly straightforward.
Larger businesses or corporations: doctorâs offices, publicly traded companies, and big financial firms need key person life insurance policies too. If a top executiveâs name or client base helps keep the business afloat, their death can affect everyone from the C-suite to entry-level employees.
The best way to determine which employees might be a good fit for key man life insurance is to figure out which employees would cause significant financial or operational loss if they were gone. For most businesses, thatâs the CEO, CFO, owner, or partner, but it could also be an employee who handles key business dealings behind the scenes, such as a legal counsel.
Who Is A Key Employee
A key employee is someone whose knowledge and skills contribute significantly to your business income. Losing a key employee would most likely cause substantial negative financial consequences for your business. According to a survey of small businesses by the National Association of Insurance Commissioners, 71 percent of the firms surveyed said they were very dependent on one or two key people for their success. However, only 22 percent of respondents had key person life insurance in place.
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How Does Disability Insurance Work
Disability income insurance is an agreement made between insurance companies and policyholders. In exchange for the monthly payments you make, the insurance company agrees to pay you a monthly benefit amount if you suffer a disability that affects your ability to work.
Disability insurance is designed to replace a percentage of the income you lose due to your inability to earn a paycheck. Having disability insurance means being able to meet your financial obligations â paying bills, covering household expenses, providing for your family â while youâre unable to work.
A disability insurance policy will spell out:
- How much you will pay in premium. Just like any other type of insurance, this is the payment you must make each month to keep your coverage in force.
- How the policy defines disability. Some policies will pay out a monthly benefit if an injury prevents you from working at your normal job, but allows you to do other types of work that will nonetheless reduce your income. Other policies will not pay benefits if you are able to work in another type of profession, even if you earn less money.
- How much you will receive in benefits. In most cases, your benefit amount will be a percentage of your income. Policies typically pay 60 to 80 percent of what you earned before your disability.
- How long your benefits will last. The benefit period may be a certain number of months or years, or up to a certain age.
When Would You Need Key Man Life Insurance
Your business depends on your employees. Your company wouldnt exist without themespecially your key employees.
Think of the person that your company relies upon the most to keep afloat. Someone that you invested timeperhaps even yearsinto training that holds a high level of responsibility.
- If this person were no longer in my company, would I be able to keep my business running?;
- Would my clients and customers seek the services of rival companies?
- Do I have someone who could take over their role right away?
Remember, it takes a lot of effort and money to find the right replacement for such a key person. During that time, you risk losing significant profit or even your business.
If you have someone like that in your company, then you have a key employeeand if you have a key employee, thats when your business likely needs key man insurance.
Many banks also require that your company purchase key person insurance to receive approval for loans or credit.;
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What Does A Key Person Policy Cover
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.
Who Owns The Life Insurance Policy
Usually, your organization owns the policy, pays the premium and is the beneficiary. Alternatively, your business and a key employee may agree to split the premium payments, cash surrender and death benefit value.
The employee must agree to the companys purchase of this insurance. The insurer may also require a resolution from your board of directors stating the policys purpose.
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Key Person Insurance: How To Prepare For The Unexpected
Every company has at least one “key person” essential to its successand perhaps its very livelihood. If you own a business, you are likely that key person.
What would happen if you, your business partner, or your wunderkind were to fall ill or otherwise be unable to work? Would your business collapse?
According to a TD Waterhouse survey, only 24 percent of business owners in Canada have a business continuation plan in place for their eventual retirement.
But what happens if there is no time to plan? How can you protect yourself if you or another key person is suddenly incapacitated? The best way is to create a business continuation plan, that includes investing in key person insurance .
What is a Business Continuation Plan?
Business continuation planning ensures you have the processes and people in place to help someone step into the shoes of the departed key person. Ultimately, this plan helps make sure the business can continue to run.
A well thought out plan includes:
- A communication strategy
- Employment contracts for potential successors
- Incentives for potential successors to remain at the business
- Successor signatory to the banking agreement
- A shareholders agreement or a one way buy-sell agreement, if there is only one shareholder
- A salary continuance agreement
Planning for a change of control is paramount and will add value to your business.
How Much Keyman Insurance Is Necessary
There’s no precise formula for determining how much keyman insurance is necessary to have. The final figure can depend on a number of factors, including:
- The size of the business and number of employees
- How much revenue or income the person being insured generates for the business
- How much outstanding debt the business has
- How much it could cost to hire and train a replacement for a key person
- Whether the business will continue operations should a key person pass away
If you own a family business founded by your parents, for example, then you may want to purchase a larger policy to ensure that the business can continue should one or both of them pass away. On the other hand, if you run a sole proprietorship and have no employees, then you might only need enough coverage on yourself to pay off any remaining debts owed by the business.
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What Does Key Person Insurance Cover
A Key Person insurance policy can provide financial coverage for a period of time after a key person dies unexpectedly. The policy can be used either to provide a temporary substitute for your company or to hire and train a permanent replacement. It can also be used to make up for any loss of profits or debts resulting from a key persons death.
Additionally, a key person insurance policy can be used as a guarantee for business loans. The policy can be put toward shareholdings or partnership interests.
What Is Key Person Insurance
Key person insurance is a life insurance policy that a company purchases on the life of an owner, a top executive, or another individual considered critical to the business. The company is the beneficiary of the policy and pays the premiums. This type of life insurance is also;known as “key man insurance,” “key woman insurance,” and “business life insurance.”
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Key Person Insurance Faqs
Find answers to your questions about key person insurance.
A key person is an employee or a business partner/owner whose skills and intellectual capital are so valuable that your business would suffer substantial financial losses due to that person’s death or inability to work due to a disability. This person has knowledge, skills or talent that few others can duplicate. The industry he or she works in, or the nature of the work, may be so specialized that there are few others with the skills needed. In addition, the unique skills held by a key person may not have been acquired through education or experience but through their own creativity, talents and interests.
Key person insurance can provide your business with the working capital it needs to keep operating and to fund the recruitment and training of a replacement should a key person pass away or become totally disabled. If the key person is the most significant contributor to your business, your company may not be able to continue operating without that person. In that case, key person insurance could compensate you for lost income should your business have to close.
This depends on the type of life insurance plan you choose for the policy. For example, term life insurance can provide coverage for 10 or 20 years at a time. However, a permanent plan like universal life insurance could provide protection for the entire lifetime of the insured person.
The key person disability insurance plan offers coverage until:
Who Owns The Key Person Policy And Who Benefits
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.
How Does A Key Man Disability Insurance Policy Work
Key man disability insurance is purchased on one or more key people in a business to protect the business from the economic loss associated with the disability of a key employee. The company buys the insurance and is also the beneficiary of any proceeds should a disability arise. If disability occurs, benefits will be paid, based on the terms of the policy, as long as the key employee cannot perform the regular and substantial duties of his regular occupation. The funds can be used at the companys discretion to stabilize the company until a replacement employee can be located.
Key Person Insurance As A Risk Management Strategy
Key person insurance is a risk management strategy, called risk transferring, that deliberately passes on risk to another party . If a key person dies or contracts a severe illness under key person insurance, it can provide a business with working capital required to:
Key person insurance is especially important for small businesses, as the loss of a key person could result in the death of the business. According to a survey of small businesses conducted by the National Association of Insurance CommissionersNational Association of Insurance Commissioners The National Association of Insurance Commissioners is a regulatory support organization that is governed by chief insurance regulators from all 50, 71% of small businesses surveyed indicated that they were very dependent on one or two key people for their success, but only 22% of the respondents took out key person insurance.
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Key Person Disability Insurance Guide
Apr 30, 2020 How Do You Qualify for Key Person Disability Coverage? It is insurance that pays a cash benefit to the business to help them deal with the;
Looking into getting a key man life insurance policy for your business? purchases the key person insurance policy and typically pays the premium. Insured: This is the person upon whose death or disability the policy would pay the benefit.
Disability insurance pays benefits when you are unable to earn a living You can also purchase key person insurance designed to protect you from the impact;
What Is Key Person Disability Insurance
Key Person Disability Insurance, also known as Key Man Disability Insurance or Key Employee Disability Insurance, is a type of business insurance that provides short-term financial benefits to a company if a key employee is no longer able to fulfill the demands of the job due to the onset of an illness, injury, or accident.
If a business loses a key employee due to disability, financial losses are likely to mount. From lost revenue to the costs of finding a replacement, the absence of a key employee can be of immense strain on the financial resources of a company. Key Person Disability Insurance provides financial protection for these types of situations and will pay out funds to the business to stymie losses and cover expenses.
Key Person Disability Insurance differs from key person life insurance in that it covers for disability and not the death of a key employee. It also differs from personal disability insurance in that the beneficiary is the business rather than the individual.
- The manager of a small automobile repair shop experienced a debilitating stroke and was no longer able to fulfill the duties required of him at the shop. Luckily, the owner purchased Key Person Disability Insurance for the manager three years ago because the manager played an indispensable role in keeping the business afloat. The owner was able to receive monthly benefits from the insurance company to cover the costs of finding and training a replacement.
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Complete The Application And Phone Interview
Once youâve decided which insurance company and policy to apply for, the business fills out an application on behalf of the key person theyâre seeking to insure. In some cases, like if the business is seeking key person insurance for the owner, the person applying might be the key person themselves. After that, the insurance company will follow up with a brief phone interview with the policyholder and the insured person .
Collect The Documents You Need To Get Started
If you talked to an insurance agent, this step is easy. Youâll not only need documents on behalf of the employee youâre seeking to cover, but also on behalf of your business. For the key person, youâll need medical records, social security information, bank statements, proof of residency, proof of income, and possibly a few more documents. For your business, youâll need profit and loss statements , tax returns, and other documents to show your businessâs overall status.
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What Is Key Employee Disability Income Insurance
Key employee disability income insurance is less well known than key employee life insurance. Nevertheless, the risk of a key employee experiencing partial, total or permanent disability is actually much greater than the risk the person will die. Should a key employee suffer permanent total disability, the loss to your business will be just the same as if the person had died. Key employee disability income insurance protects the business from this loss exposure by paying you anywhere from 40 to 70 percent of the disabled employees earned income.
If the disabled person is a partner or sole proprietor, a business overhead expense disability policy provides some protection. This pays, up to the policy limit, office expenses including rent, utilities, salaries and depreciation that continue when a partner or sole proprietor is disabled.
Why Do You Need It
The repercussions of losing an important business contributor can be devastating. University of Central Arkansas researchers cite the loss of a key person among the top causes of small business bankruptcies.
Key person insurance will ensure that your company is financially protected from the fallout of a key persons death, so you can recover and move forward. Your company will be better able to cover hiring or training a replacement. You can also make up for loss of profits or any debt that you may incur while the company is recovering.
Key person insurance is necessary even if your business plans to shut its doors after the loss of a key person; the money can be used to cover the closing costs, pay off investors, and provide severance packages for employees.
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