keyman life insurance

Key Man Life Insurance

Every company has employees that are central to its functionality and they must be protected by all means. Most companies opt for the “keyman life insurance policy”  

Keyman or key person insurance refers to a life insurance policy that a company or business buys on the life of the owner, chief executive officer, or any other employee or individual significant to the business. The insurance also goes by the name, “key woman insurance” or simply “business life insurance.”

Companies that purchase key person insurance are also the beneficiaries. Besides the company takes the responsibility of paying the premiums. If the key person passes on, the insurer releases the death benefit to the company. The significance of the keyman life insurance is that if the insured employee dies or gets a disability, the company’s future is at stake.

The Purpose of Key Person Insurance

  • Key person insurance policy allows businesses to maintain their financial foundations after the death or disability of their main employees.
  • When a key person dies, the creditworthiness of the company diminished. In most cases, banks recall the loans guaranteed by the keyman. The death benefit covers such shortcomings.
  • In some cases, keyman life insurance compensates the business if the key person was working on canceled projects. The funds are used to compensate the partners in the project.
  • Investors and lending companies typically require the key person’s life insurance on the managers’ teams before they release funds.
  • In conjunction with the owner, key employees include those whose skills are highly skilled or industry expertise.
  • Key persons have a strong reputation for business success and they are always steering the company to higher levels of productivity. The loss of key persons means poor sales, management, and stable labor relations. The key person insurance covers such shortcomings.  
  • Keyman covers loss of opportunity for future expansion. Before the company replaces key men, they need funds for hiring and compensating business losses during that period.
  •  Keyperson insurance should also apply in the event a business does not have any key personnel. The money compensates for the loss of skills that the key person rendered to the business. While key employee life insurance is usually purchased for high-earners, the face value of the policy is often limited to a multiple of the insured’s income, such as 10X. Even so, depending on the insurer and your company structure, your annual bonus or a portion of the firm’s net income may be included in your employee’s income.

Who Can Be A Key Man in a Business or Corporation?

  • The founder/co-founders
  • The main salespeople in your company (they rake in the most revenue)
  • The key project managers (manage the most profitable projects)
  • People with specific skills in your company (formula makers, designers)
  • People with trade secrets

How Key Man Life Insurance Works

The sudden death of an employee can significantly affect the business. In some cases, losing one key employee may mean decreased productivity and even company closure. Keyman Life Insurance provides financial security for the company and helps offset this loss.

Generally, a Keyman life insurance policy covers the replacement costs for the key worker and any additional costs the company incurs as an outcome of its employee’s death. The policies also serve as an assurance to family members of the deceased employee financially. Keyman Life Insurance includes Term or Whole Life Insurance.

Key Man Disability Insurance

This policy helps if a key employee cannot continue working for the purpose of their disability. A standard disability insurance plan allows the employee to make a living or pay medical bills. A worker disability insurance policy covers the loss of revenues for the business, and costs for hiring new staff, and training new staff among others.

Costs are determined by the age of the employee, overall health, and role within the organization. Other considerations include the activities of someone who is not working such as cycling.

When Should A Business Need Key Man Life Insurance?

At times, your business could be struggling and funding options are either slow or unavailable. At the same time, your business needs some money to stay afloat and run its basic operations.

A person’s life insurance policy may be needed for businesses to get loans or invest.  Small businesses are usually dependent on one or two people and at times, they are family members. Most bank lending criteria require the life insurance of the co-founders. Likewise, a keyman life insurance is necessary when an investor wants assurance that the employee losses will never result in bankruptcy for your business.

If a financial institution or other creditor needs collateral for a business loan and requires the option of putting a lien on a key person policy, you can put the key executive life insurance policy.

Other than borrowers’ requirements, companies generally purchase key person life insurance to provide financial security. In the unpredictable business environment, anything can change leading to massive losses. Keyman policies are necessary if employee loss can affect your business’s productivity and financial stability.

Key Man Life Insurance Tax Treatment

Keyman’s Insurance pays out with after-tax funds that are not tax-deductible. Only exceptions are made when employee earnings are increased by a benefit from an employee’s health insurance coverage. If you are concerned about the taxes, a company accountant should be in touch.

The death benefit on a life insurance policy is generally paid at death without tax, but you need to understand that there are exceptions in C companies. For corporations, the death benefit should be included in your alternative minimum tax calculation. Your corporation must provide annual key man coverage on their tax return.

Is Key Man Insurance the Same as Life Insurance?

You need to understand the intent of keyman life insurance and life insurance policy.

Differences between Key Man Life Insurance Policy and the Life Insurance Policy

Life Insurance policies offer personal protection. Upon death, the insured person’s family receives monetary support in terms of death benefits. People pay for their life insurance policies.

Typically, the Key person insurance policies are meant for business purposes only. The insurance covers employees who play significant roles within the company. When the insured people die, the business receives a cash injection crucial to its survival.

If key persons die, several company operations may be jeopardized which will affect their productivity.

Key man life insurance is an excellent employee benefit if the company pays for the policy using tax-free money.

Similarities Between a Key Man Life Insurance and a Life Insurance Policy

The only similarity is that both insurances offer life insurance to people. The insurances basically cover and compensate for the loss of human life regardless of whether the person was key or not.

What type of life insurance can be used as a Key Man Life Insurance?

Both term life insurance and permanent life insurance policies can be doctored to Keyman Life Insurance.

Term Life Insurance

Term life offers coverage for a pre-set period such as 10-20 years. It is affordable given that it is less expensive. However, the term is usually set to expire at a certain date when the premiums are paid to the company. For instance, in case the employee retires the company gets premiums.

Permanent Life Insurance

The advantage of permanent life insurance is that it offers lifelong coverage. The company can opt to put some of the premiums into a cash-value account where they earn interest over time. In addition, the business can use the value of the premiums to get collateral for a loan. If the permanent life insurance was taken by a mutual insurer, the premiums can earn the company some dividends.

In the Keyman insurance term, coverages tend to be either whole life insurance or term life insurance. The insurance is structured to serve the benefit of the employee if the policy’s cash value is transferred to the insured after a specific period in one’s life.

The policy has an exchange rider on a permanent policy that allows for changing insurance policies if the worker quits. The downside of the permanent life insurance policy is that it is expensive, but should the company feel burdened, they can opt out of it and take their monies.

Types of Life Insurance

Most insurers have designed Life insurance policy structures are designed to serve as Keyman insurance policy structures. Life insurance usually offers coverage for 10-40 years. The premium is cheaper and generally has an estimated time period associated with the retirement date. Permanent Life Insurance policies provide protection against lifelong illnesses. The premium is paid in cash or in savings accounts. This cash value increases in age and may act as a security for loans. Permanent life insurance premiums can generate profits for businesses or be used to pay employee benefits.

How Much Key Man Life Insurance is Needed?

It is important for companies to know how much protection is needed to protect their employees and their family members depending on the effect the person’s loss will have on the company.

General factors that must be considered include:

  • Insurers argue that the Keyman life insurance cover will rely on the nature and size of the business.
  • The role of the key person dictates the amount of cover.
  • The cost of the key person insurance cover also relies on whether the company will buy a permanent life policy or a term life policy. The company should also note that whole life or permanent life policy is more expensive than a term life policy.
  • The coverage costs will also rely on the age of the key persons and their health status.
  • The employee should also determine the revenue that the project managers or salespersons earn the company.
  • The structure of the company is also a factor that the insurer should consider.

Most insurers use the Multiple compensation formula. You multiply an individual’s compensation by the number of years that the company estimates to take before claiming their deceased.

The Cost of Key Man Life Insurance

Keyman Life Insurance
Noel Insurance Services, Key Person Insurance Policy Agreement

You need to understand that the following factors influence the amount of Keyman insurance coverage

Policy Death Benefits

A higher amount of key life insurance coverage means that the company must also pay higher premiums. For instance, an insurance cover of ten million dollars will attract higher premiums in comparison to another one of one million.

Kind of Policy Purchased

Permanent life insurance is more expensive in comparison to term life insurance. You also need to note that term life insurance policies lack the advantage of accumulating cash values. However, you should also understand that various permanent life insurance policies attract various levels of risks, benefits, and costs.

Employee’s Health and Lifestyle

The insurer must assess the occupation, medical history, hobbies, motor vehicle records, general health, hobbies, travel history, and family history to determine risk levels. The levels of risk play a key role in determining the premium. If the employee is old with health issues, the cost of keyman life insurance will definitely be high. Some insurers may avoid offering you keyman coverage if the risk is quite high.

Limitations of Key Man Insurance

Keyman Insurance protects businesses financially only in cases of the death of employees. The policy does not cover loss for an important individual who is considering retiring or taking a new job. This kind of policy does not cover employees unable to perform their duties for the purpose of generating income. You don’t need insurance for employees who are employed outside the workplace by other businesses.

What’s Not Covered?

Every insurance company has exclusions in key people policies. Generally speaking, life insurance contracts include a contingency period of two years. If an insurer has received unauthorized claims from the claimant during this period, they must conduct an independent investigation and reexamine the claim for fraud and omit all information. Key person policy does not cover suicide