A key person insurance policy (sometimes known as a key man policy) can — in the right circumstances — save a business from financial ruin. Essentially, a key person insurance policy is a life and disability insurance policy that a company takes out on one (or more) professionals who are vital to the company’s viability. In the event of that person’s death or incapacitation, the company would then receive a payout based on a number of factors. Today, we’ll explore a few technical aspects of key person insurance policy, specifically: the information a company needs to successfully apply for one.
In many ways, the process of applying for key person insurance is similar to “regular” life and disability policies. The big difference, though, is that the company pays the premium and collects the benefits in this arrangement. As with any life insurance policy, though, the insurer will require certain personal information about the person being insured. This includes basic background information like the key person’s age and gender. In addition, some insurers may ask about certain lifestyle habits and health history. For instance, insurers may ask if the key person smokes cigarettes.
Personal injury is just one facet of a key person insurance policy.
Lastly, many insurance carriers require applicants to undergo a medical examination (basically a health physical) before they grant a policy.
Personal information is just one facet of a key person insurance policy. From the company’s standpoint, business leaders should seek out certain pieces of information relating to the key person’s position within the company, and, more importantly, their contributions to the company’s success. By determining — as accurately as possible — how much a key person contributes in terms of revenue (and/or production and growth), the business can then request for the appropriate amount of coverage from their policy.
For example, it doesn’t make any sense to obtain a key person insurance policy worth $100,000 if that key person generates over $100,000 in revenue per year. The payouts from such a policy would hardly constitute meaningful compensation for the loss of such an employee.
Ideally, a business should know all of the following things about a key person before they apply for key person insurance:
- Overall business revenue.
- Key person’s salary (including bonuses).
- The key person’s contribution to business revenue. (E.G. 10%, 20%, etc.)
- How many years it would take to replace the key person.
- How many years it would take for a replacement employee to become fully proficient.
The good news is, once you’ve determined those figures, you can use our free key person insurance calculator to help you determine how much insurance coverage your business will need.
Business leaders should be aware of the fact that professionals must give their company consent to take out a key person insurance policy on them. Also, it is possible for a business to hold multiple key person policies on different professionals at the same time. Finally, a business owner may even take out a key person policy on themselves — with the business itself acting as beneficiary.
Blue Herring is an organization dedicated to helping business leaders safeguard their company’s future. We’re experts in key person insurance, and we can help you find the best possible coverage at the best possible price through our WayPilot Program. To learn more, contact us here for a quote or use our key person insurance calculator to calculate the level of insurance coverage you need today: