What is Key-Man Insurance, what does it do, do I or my company need this type of insurance policy?
Key-Man Insurance or Key-Woman insurance is a life insurance policy taken by a company or organization on the life of a key-person within that company.
Who Within A Company Should Be Insured with Key-Man Insurance?
The person in question could be an executive or a person that is irreplaceable to the company. Key-man insurance is intended to cover individuals within a company or organization that may have specialized knowledge essential to the company’s ability to sustain itself and grow. Such individuals may generate a major source of revenue through sales and/or marketing. Someone whose absence would cause the company a financial loss. Other individuals within a company worth insuring might include individuals whose creative or technical skills are critical to the company’s performance.
The insurance would provide the company with the death benefit in the event of the death of such an indispensable person. It is intended to provide the financial means for the company to replace such an important person and the time needed to do so without having to suffer a financial burden.
Another point of importance is not just the death of such an important person but the long term disability of that person making them unable to continue on their successful revenue generating course of employment for the company.
How Is Key-Man Insurance Coverage Determined?
The amount of life insurance coverage on this person will be determined by the calculations of the lost revenue from all sources, such as sales and marketing and the good will that this person brings to the company. Added to this calculation will be an amount needed for the time and expense to locate and hire a replacement employee.
The policy is designed to benefit the company who is the premium payer, beneficiary of the policy and the policy owner. The amounts of coverage come down to the potential revenue lost and the cost to find and train a suitable replacement.
Key-Man insurance policy is a life insurance policy on an important person within the company. The premium should be tax deductible. Likewise, should the company receive proceeds from such a plan, they are considered income and therefore taxable. You should include your CPA in these discussions and decisions regarding the tax-implications of a Key-Man Insurance plan.
In almost all of these situations, the best type of insurance is a term insurance policy insofar as it is less expensive than whole life or universal life and the needs are usually short term. Term insurance policies can be bought in 1, 5, 10, 15, 20, 25 and 30 year intervals.
Key person insurance plays an important role in both new and existing companies. Imagine Apple as a startup company and the visionary Steve Jobs a key indispensable person, but the same was true when Apple became the world’s richest company. Could Ford motor company do what it did without Henry Ford? That is why many investors as well as stock holders believe key person insurance is a vital tool to help insure the long term success of a company.