What is a key man insurance policy? Fascinating Facts!

Are you considering buying key man insurance and you don’t know, what is a key man insurance policy? Well then, this article is for you. Keep reading!

Key man insurance can really be helpful for your business, if the key employee of the company dies or becomes permanently handicapped. If you are running a small business, you would know that your staff is your valuable strength.

what is a key man insurance policy

A small firm might suffer substantial harm if it does not have essential business partners or core personnel. In this situation, key person insurance, a sort of company insurance, might become in handy.


How Does Key Man Insurance Serve Small Businesses

Key man insurance serves small businesses to help them financially if the key employee of that company dies or becomes handicapped and cannot perform his duties. Key person is that employee of the company whose talent and expertise significantly contribute to the business profitability. A key person may include Business Owner, partner, or any top seller.

Even if your company does not have a key employee, key person insurance can be beneficial or vital. For example, partners can purchase key person insurance to buy out former partners’ shares in a small business partnership. In addition, investors often demand key person insurance on a company’s management team.

According to the Society for Human Resource Management, it costs between 90% and 200% of an employee’s annual salary to discover and instruct a substitute. In the case of normal turnover, this is correct.

If a key employee of the company dies unexpectedly or becomes handicapped and unable to work, the cost to the company can be even significantly high. In these situations, key person insurance provides you with options to don’t have to close your business or declare bankruptcy. If I were you, know how key man insurance can help protect the life of a business. 


What Key Man Insurance Company Offers To Cover

So, what is a key man insurance policy? Key man insurance provides the funds to the business in case of ultimate demise of the key person so the business can continue their work operations without massive crisis.

Key-person insurance funds can be used towards the following:

  • You can use  to cover the operational expenses
  • You can use to train the replacement
  • Yiu can use to make up for lost income
  • Key man insurance proceedings can also help in buying the former owner’s share in the company
  • Suppose the owner doesn’t want to continue the business and is determined to shut it down. In that case, the proceedings can be used to clear the company’s debts, give salaries to the workers, and distribute the amount to the shareholders.


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How To Purchase Keyman Insurance?

If you want to buy a keyman insurance policy for your company, you should first ask yourself a few essential questions, such as:

Is it necessary for the insurance to cover death, disability, or both? In your situation, how much key man coverage is required and appropriate?

Will this policy be included in a buy-sell agreement? What will happen with the proceeds if the key person covered dies?

If you’re insuring an employee, has that employee given their consent, or is it likely they will? Is it better to get term life insurance or permanent life insurance?

Multiple companies offer key man insurance but consider the type of insurance, its available proceedings, and the premium you need to pay before buying this insurance. Again, you can discuss this with specialized insurance agents.


Why Is It Necessary To Have Key Man Insurance

The company cannot continue to operate if specific individuals are lost. Key partners would undoubtedly impact your company is gone, considering the knowledge and talent they possess. How quickly can key personnel be replaced? Consider the revenue impact of these people leaving, and ensure you have the coverage you need to get back on track. For you to understand better, know the three reasons to have key man insurance


Financing Requirement And Future Expansion:

Before extending any financing or credit to the company, banks or financing institutions may require key man insurance coverage. It helps to ensure the business plan’s stability and long-term viability, lowering the lending institution’s risk.


Business Continuity:

Business cannot be taken over if there is no business continuation plan. If it’s a family business and no member is willing to continue it and only wants to be bought out, it has nothing to do with the future of the business. So if the tragedy occurs, the insurance would cover the partner buy/sell issues—more on how to plan for the future of your business.


How Much Will Key Person Insurance Cost?

Insurance for key personnel is expensive. It can cost as little as $1000 per year to $1000 or more per month. Each of your key persons requires a separate key person policy. The insured’s age, health, and lifestyle are directly influenced by Prices, just as they are with personal life insurance. Some of the factors that might affect the cost of the policy include:

  • Gender, age, and health of the insured key person
  • Company and designation of the insured
  • The annual pay of the insured


It’s a Wrap!

Now you have all the relevant information about what is a key man insurance policy.  If you are running a business, you can buy critical person insurance, but before purchasing, you need to consider every point discussed above. For more insurance articles, read what is stop loss health insurance and when is the best time to buy car insurance. Thank you for reading! I hope you have learned something! 

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