Key person insurance is often called key-man insurance. Key man insurance is just life insurance on a key person in the business. In most businesses, this is usually the owner(s) and maybe a couple of ‘key’ employees. These are the people who are critical to a business; without them the business’ profitability and sustainability would suffer. You need key person insurance coverage on those people! And often the most key person is you…the owner.
It is a policy taken out by a business to allow compensation for financial losses resulting from the incapacity or death of an important employee. Although there is no legal definition for it, key person insurance is an important type of business coverage. Another purpose of this coverage is to contribute to the continuity of the company. A policy’s term does not exceed the point of the key individual’s usefulness. Although this coverage does not indemnify actual losses, it does provide a fixed sum.
Employers may obtain key person insurance for the health or life of a worker contributing special skills, knowledge or other contributions. Employers obtain this coverage to offset the costs associated with losing the employee. Expenses such as hiring successors, decreases in business and training temporary workers are all important considerations for employers.
Who Qualifies As A Key Person
Research shows that many businesses depend on at least one or two key employees for their overall success and profitability. However, less than 25 percent of employers have life insurance for their key persons.
Anyone who is directly associated with the business may be considered a key person. In addition to this, individuals whose loss could result in serious financial strain usually qualify. For example, company directors, key salespersons, partners, key project managers or other valuable individuals with unique skills normally qualify.
Loss Categories For Key Person Insurance
For key person insurance compensation, there are four separate categories:
– Insurance for protection of partnership interests and shareholders. As a rule, this type of coverage provides remaining business owners / partners the funds to buy out the ownership stake from the deceased owner / partner’s family or estate. Imagine the scenario where a former owner / partner’s spouse wants their ownership to be bought out by the company.
– Losses connected to the period when the key person cannot work, when temporary personnel must be provided and when it is necessary to pay for training and recruiting an adequate replacement.
– Insurance for any parties involved in guaranteeing banking/credit obligations or business loans.
– Insurance for profit protection. Some examples include offsetting lost income from cancellation of a business project the key person was involved in, lost sales or losses from delays. There are also several other types of losses.
The treatment of funds received and tax rules for premiums paid for key person coverage vary. In the United States, premiums are not tax deductible. To learn more about key person coverage, discuss the options with an agent.
Also note; key person life insurance is more popular than key person disability coverage. However, it’s important to consider the possibility of an employee becoming partially or fully disabled and the effects the disability would have on the financial future of the business. If the key person is a sole proprietor or partner, it may be best to consider a business overhead expense policy for disability coverage.
Contact us for help with a plan to cover these situations.