Key Man Insurance

What is Key Man Insurance?

Key Man Insurance is a life insurance policy designed to cover costs associated with replacing a key employee in the case of unexpected death. These policies are also referred to as Key Woman Insurance or Business Life Insurance.  The company is the owner of the policy as well as responsible for paying all premiums, and the company receives the death benefit if a death occurs.

How does Key Man Insurance work?

Key Man Insurance can be used in any kind of business: sole proprietorships, partnerships, or corporations.  The point of securing Key Man Insurance is to ensure the health of the business should a key employee die.  This kind of policy is primarily used for founders, high-level executives, or employees that would take several months if not years to entirely replace.  In many small businesses, the founder is crucial to the day-to-day operations, which is why Key Man Insurance is vital to ensuring the business is protected if the founder dies.  

If the ‘key man’ were to die, the policy would pay the death benefit, which can be used for any costs associated with replacing the employee.  The policy is designed to help with any financial troubles within the business due to the loss of the employee.  If the business would suffer due to the sudden loss of a single employee, Key Man Insurance is essential for the long-term health of the company.

The Nuances of Key Man Insurance

Key Man Insurance functions to reduce chaos when a key employee dies.  These policies can help protect the business fully in the case of an unexpected death.  When a company buys a Key Life Insurance policy, they pay the premium and they are the beneficiary.  If a death occurred, the business would be the recipient of the death benefit.  The payoff can be used for any of the business expenses or in more grim scenarios, severance.  Key Man Insurance can help businesses avoid potential bankruptcy when a key employee dies.

Why is Key Man Insurance necessary?

If there is an employee that could not be easily replaced, Key Man Insurance should be considered.  Typically this would be the founder of the company due to the fact that they understand the ins and outs of the business and likely established many of the business protocols within the overall operation.  These kinds of policies are designed for businesses to avoid financial disaster in the event of an unexpected death of an important employee.

How much Key Man Insurance is enough?

Every business will vary in their Key Man Insurance needs, but generally companies should purchase the maximum amount in their budget in order to be fully protected in the case of untimely death of an owner or critical employee.  Businesses should request that their advisors provide quotes for $250,000, $500,000, and $1 million, in order to consider the best policy for their individual needs.

Would you like to discuss Key Man Insurance?

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