Contemplating the death of your company leaders is pretty dismal subject matter. But think of the consequences - businesses have bitten the dust due to the death of just one employee. Key man life insurance is an affordable way to prevent your business from sinking after a critical employee passes away.

Key person insurance, also called, especially formerly, key man insurance or sometimes keyman insurance, is an important form of business insurance. There is no legal definition for "key person insurance". In general, it can be described as an insurance policy taken out by a business to compensate that business for financial losses that would arise from the death or extended incapacity of the member of the business specified on the policy. The policy’s term does not extend beyond the period of the key person’s usefulness to the business. The aim is to compensate the business for losses and facilitate business continuity. Key person insurance does not indemnify the actual losses incurred but compensates with a fixed monetary sum as specified on the insurance policy.

How does Key Man Life Insurance Work?

Key man life insurance works like individual life insurance - when the insured dies the policy pays out a benefit. Instead of an individual insuring himself or a family member, however, the business owns the policy and pays the premium. If the insured dies, the business is the beneficiary and will receive the policy payout.

To ensure the livelihood of the company, the money can be used to pay off debt and keep creditors at bay, find a replacement for the deceased, buy out the deceased's shares in the company (buy-sell agreement), or even help to supplement the income of the deceased's family.

The founder or owner of a business shouldn't immediately be considered the right or only candidate for a key man life insurance policy. Rank is less important than who the critical employees in your business are. Your business couldn't function day to day without the founder, but it also may not be able to survive without your revenue-generating sales team or without the precious relationships a business development employee has with your vendors.

How is Key Man Life Insurance Set Up?

Structurally, many key life insurance polices are set up as permanent polices that build cash value over time. However, a smaller business can opt for a more affordable term life policy where premiums are paid until the employee retires or leaves the company, and then it can be transferred to that key person's replacement.

In general, coverage ranges from matching the key person's base salary to as high as 15 times his salary - or it can be a flat amount. Most small businesses find they do best with a payout of two to three times the key employees' salary, at a cost of less than $1,000 per year for the premium. A permanent policy will cost more, about 3 percent the face value of the policy.

It's not fun to think about, but key man life insurance is an affordable way to ensure the future of the business these critical employees you're insuring have worked so hard to make successful.

If you are interested in learning more about key man life insurance, or if you need to speak with an agent to design a keyman life insurance quote, please click the advisor icon below or email us at info@erollover.com, and we will have an eRollover advisor contact you today.

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