What is Key Man Insurance?


Running a business is hard work and it seems like immediate concerns are never-ending, whether it’s payroll, hiring new employees, marketing strategies, paying bills, and so forth. Delegating these tasks is the best strategy for sanity, but looking ahead, can you imagine if you lost a key employee—would your business be able to function?

This is where something called key man insurance (also known as the gender-neutral “key person insurance”). Simply put, key man insurance is life insurance on the key person in your business model. For small businesses, one of the founders or a valuable long-term employee tends to be the obvious choice.

How Key Man Insurance Works

By paying the premiums of a key man insurance policy, a company purchases a life insurance policy on the key employee. The company is the beneficiary of the policy so that if that key person unexpectedly passes away, the company receives an insurance payoff.

The key man insurance’s purpose is to essential aid the company while it transitions from the loss of the person who makes the business work. This insurance also can:

  • Use the proceeds for expenses until a replacement employee is found,
  • Pay off existing debts,
  • Distribute outstanding money to investors,
  • Provide severance pay for current employees, and
  • Close the business down in an orderly and efficient manner.

Essentially, key man insurance gives the company more options other than immediate bankruptcy.

Reasons You May NOT Need Key Man Insurance

Of course, not every business model will benefit from this type of insurance. If the company is a solely yourself without any other employees or other people who depend on its existence, then key man insurance isn’t as necessary.

Also, don’t make a common mistake and confuse key man insurance with personal life insurance. If you have a spouse, children, or family members who depend on your income, then you should have personal life insurance for that purpose instead.

How Do You Determine Who Needs Key Man Insurance?

Looking at your business objectively, determine who is irreplaceable in the short term. The founder who holds the company together is usually the most obvious choice, as they may manage the bookkeeping duties, supervise employees, handle the key accounts and so forth. Without the person, small businesses tend to come to a halt.

How Much Key Man Insurance Do You Need?

Determining how much key man insurance you need is simple: you should get as much as you can afford. Most life insurance agents will sell you a key man policy. You’ll have the option to sign up for whole or variable life insurance policies, but unless you’re completely sure about future, term life insurance should be your best option. Whole and variable insurance policies tend to have higher premiums and commissions.

Next, shop around for quotes at varying levels. Would $100,000 be enough to restructure your business? $250,000? $1 million? While it may be a morbid concern, try to determine just how much value this person brings to your business in addition to the value that a similarly-trained employee will have until your business gets back on its feet.

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Now that you have a basic understand of what key man insurance is, you may still be curious to know if your business needs it. To be absolutely sure, contact a qualified insurance agent at RiskBlock by clicking here to find an affordable solution should tragedy strike one your company’s best.

Author: Liam Dai
Lead Insurance Advisor for RiskBlock. Disclaimer: This Blog/Web Site is made available by the author or insurance agency for educational purposes only as well as to give you general information and a general understanding of the insurance coverage, not to provide specific insurance advice. By using this blog site you understand that there is no professional advice and professional client relationship between you and the Blog/Web Site publisher. The Blog/Web Site should not be used as a substitute for professional advice from a licensed professional insurance agent in your state. All scenarios are different and unique to the situation.