Key man Company life insurance is a life insurance policy that a company purchases on the life of an owner, a top executive, or another employee that is critical to the operation of the business. The business owns the policy and is the beneficiary. The business also pays the premiums.
The business owner should ask him or herself:
- What would happen if that key employee died?
- Would the business be able to keep operations going and keep the status quo?
- What financial impact could that death cause?
- What dollar amount would be needed/wanted if that key employee was to pass?
By having Key Man coverage, a business can weather the storm if a key employee passes. The death benefit can be used for
- Recruiting, hiring, and training a new employee
- If the business can’t be continued, the money can be used to pay off debts, distribute money to investors, and provide severance to other employees
There are different types of life insurance that can provide different kinds of benefits.
- Term Life Insurance will provide the lowest out-of-pocket cost for the business owner
- Permanent Life Insurance (Whole Life, Indexed UL, Universal Life)—although it will require a higher premium, the policy now represents a corporate asset. Policies with cash value can provide a business with access to income (tax free)
Generally, carriers will allow up to 10x an employee’s income in determining maximum coverage, but it will vary according to the individual circumstances. If you believe you have a client who could benefit from key man life insurance, please let us know.