Key Man Life Insurance

Every business organization has a key person or persons who should be considered to be insured with Key Man Life Insurance.  This is the person or persons typically responsible for the product or service that drives revenue to the company.

Key man life insurance can be the owner or officer or simply the person who is depended on for the success of the organization. If this person were to die or become disabled, it is imperative that the company has a plan to replace them. This plan can easily be funded with life insurance that would make the funds available for the following expected expenses:

  • Pay for inevitable recruiting expenses.
  • Replace lost revenue during the recruiting period.
  • Pay off or pay down company debt.
  • Help pay distributions to all investors in the organization.
  • If found necessary, pay expenses to close the business in an orderly manner.

How it Key Man Life Insurance Works?

The business designates the key person or persons and purchases term insurance in an amount sufficient to cover expected expenses and losses for a period of one or two years. The insurance premiums are paid by the company and the company is the beneficiary. In the event of the death of a key person or persons, the life insurance proceeds are paid to the business entity and will be available to help the business financially survive the loss of its key person or persons.

Which Key Man Life Insurance Product to Use?

Depending on the needs of the business, the insurance product to use for key man life insurance is either Term Insurance or Whole of Life.

    • Term key man insurance is the most affordable way to insure the lives of key personnel, but there are no “living benefits” that can be accessed if needed. If your key person leaves the business, the company could assign the ownership to the named insured in order for them to continue the policy if requested rather than cancel it.
    • Whole of key man life, although somewhat more expensive, does offer “living benefits” for the business and the insured key person. For example, since the company owns the policy, it could access the cash value in the policy for financial emergencies or other reasons through policy loans or partial surrender. If the key person were to leave the business or retire, the company could surrender the policy and offer the proceeds to the key person as a bonus or incentive for offering a longer than usual notice. The Whole of Life policy also has the flexibility to change the face amount and periodic premium however the company sees fit.

Having a defined business continuation plan should be a key component in any organization and life insurance is the most affordable and efficient way to fund this plan. For more information, speak with a Trusted Union insurance professional about making certain your business survives if the worst thing should happen.

Key Man Life Insurance FAQ

Is key man life insurance tax deductible?

Key man life insurance is essentially a life insurance policy a company takes out on a key person to cover the financial loss a business might face if that important person were to die or become disabled.

On the surface, it may look like a typical business expense paid for risk management (much like building insurance premiums or paying for cyber security). But oddly enough, premiums paid for key man life insurance is not tax deductible in most cases.

There are a ton of details, we’re not tax consultants and it varies on a case by case basis. Speak with a licensed Trusted Union key man life insurance expert to learn more.

What can key man life insurance benefits be used for?

When a person critical to your company’s success dies or becomes disabled and unable to work, there needs to be a solid plan in place to replace them and mitigate the financial losses that accumulate in the meantime. Such plans can be paid for by the death benefit provided by your key man life insurance policy.

The death benefit comes with no strings attached and can be used for whatever you want but some common uses include:

• Paying recruiting expenses
• Replacing lost revenue until a suitable replacement can be found
• Paying down business debt or other financial obligations
• Pay distributions to investors
• Pay expenses required to unwind the business in an orderly manner if the business can no longer operate

Every business should have a contingency plan in case they lose a key functionary. A key man life insurance policy gives you the funds required to put that plan into action and smooth out any loss of revenue in the meantime.

Who is the beneficiary of a key man policy?

Key man life insurance is purchased by a business to insure against any financial losses they may suffer if they lose a key man. Since the business is paying for the life insurance policy, the business is the beneficiary.

This is not to be confused with regular life insurance that a business purchases for an employee (i.e. as part of a group benefits package). In that case, the beneficiary would be the employee’s family and dependents.

Why is Key man insurance important?

Key man life insurance is important for businesses because the loss of a key man can financially devastate a business.

Often times, there is a person or persons who are critical for the continued success of the business. This could be a person who holds key relationships, brings in a large percentage of the company’s revenue, has key knowledge, or otherwise handles a ton of critical operations for the business. In all of these cases, the business could suffer tremendous financial loss if they were to suddenly die or become disabled and unable to work.

If you’re a business owner or key employee, think about what would happen to your company if you were to die or become disabled. What short-term and long-term financial consequences would there be? What critical tasks are you handling right now that would be left undone if you weren’t around? How long would it take to recruit and train someone to replace you? How much money would your company lose in the meantime?

Key man life insurance ensures that you have the funds necessary to ride out the dip in revenue while you look for a suitable replacement to ensure the continued survival of the business. It gives you the funds necessary to execute your disaster recovery plan.

Can Key man insurance policy be assigned?

Yes. A key man life insurance policy can be assigned to the individual the policy is insuring. Once this happens, the premiums are paid by the key person themselves and the benefits go to the key person’s family and dependents if anything were to happen.

Who owns a key man policy?

Although a key man life insurance policy insures a particular person, the policy is not paid for by that person and the beneficiary of the policy is not that person. The policy is bought, paid for and meant to protect a business whose continued success depends on a key person.

Therefore, the business is the one who owns or administers the policy.

What's a key person?

Every business has a person or persons known around the office as the “rain maker”. This is the person responsible for bringing in a huge amount of revenue, holds key client relationships or has some kind of specialized knowledge that makes them indispensible to the organization.

A key person is someone that the success of the business depends on. It can be the owner, an officer or director, or an employee.

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