The decision to invest in key person insurance, or key man insurance as it’s sometimes known, is a serious one. Because key person life and disability insurance may prove essential to a business’s viability, it’s important for professionals to understand how key person insurance works and how they should go about getting it. Thankfully, answering these four questions will allow businesses to move forward with a key person insurance policy with confidence:
Do You Need Key Person Insurance?
As one might imagine, the first step in purchasing key person insurance is to determine whether or not your business actually needs it. In brief, key person insurance is a life and disability insurance policy that a business takes out on an indispensable person to protect it from the losses incurred as a result of the key person’s inability to work. Should a key person pass away or become disabled, the policy would pay out a cash benefit to help mitigate the economic loss. In this instance, the company acts as the beneficiary of the policy — meaning the business pays the premiums but also gains the pay-outs.
Small companies that rely heavily on one or two employees need key person insurance. Also, larger businesses that have an important executive or employee that is impossible or extremely difficult to replace should consider taking out a key person insurance policy. More often than not, the owner or owners of a company are vital to the operation and should be protected as well. (Note, some businesses may require a buy-sell agreement in addition to or instead of key man insurance for the owners.)
Many succession plans depend on the retention of top executives to guarantee the smooth transition of power from one individual (or group of individuals) to another.
Who Should be a Key Person?
Businesses can more or less select whoever they want to designate as a key person in a key person life or disability insurance policy. However, it’s important for a business to select someone who is integral to the company’s continued existence and success. Often, a key person is responsible for generating a significant portion of the company’s revenue, or else providing a service that no one else can offer and is crucial to the bottom line. Some common examples of a key person include:
- Top Sales Professional.
- Department Manager.
- Employee with highly specialized skills.
Remember, businesses may elect to take out multiple key person insurance policies as well.
How Much Coverage Do You Need?
Executive compensation can affect a business’s bottom line, its ability to attract new clientele, its
Each key person insurance policy is unique to the company and the key person in question. Therefore, it’s important to figure out exactly how much coverage the business needs to avoid being either over or under insured. There are a few factors to consider in determining the amount of key man insurance coverage a business needs, such as:
- The key person’s compensation.
- The estimated cost of replacing the key person.
- Recruiting costs and competitive compensation,
- The time it would take to find a replacement,
- And the additional time to get them fully up to speed!
- The key person’s contributions to the business (revenue contributions patents, contacts, etc).
How Much Does Key Person Insurance Cost?
Again, there is no “uniform” cost to a key person insurance policy. In addition to the factors listed above, any number of considerations like the key person’s age/health, the size of the company, its industry, and the nature of the policy may affect the total cost. The good news is you can get a quality estimate by using our free insurance-cost calculator here:
Securing the right key person insurance coverage can save a business from going under. So partnering with the right insurance company is vital. At Blue Herring, we have years of specific experience in business continuity planning and executive compensation. We’re experts in key person insurance policies, and we operate differently from other firms in our field. Since we’re fully independent, we’re able to ensure you get the best quote possible for your particular needs. Contact us here for more information or to get a quote.