Key-Person Insurance

Key man insurance is life insurance purchased by the company on the life of an employee or employees whose loss would have adverse effects on the company. Employees are valuable assets and the loss of some key employees could significantly impact the profitability, stability and progress of the company.

Often times certain employees or executives are hired because of their own specific expertise they bring to the company. Other employees just seem to represent the persona of the business and have earned the respect, loyalty and credibility of customers, vendors, suppliers, creditors, etc. The loss of those persons could result in some business interruption in some fashion. Small businesses are just that way. Those intangibles are what makes many small companies successful.

The objective of key man insurance is to financially protect the company from adverse impacts if one of those key employees suddenly dies or becomes disabled. The finances available from a key man insurance policy would:

• provide funds to find, recruit and train a replacement

• help replace any profits the company may have earned had the employee not died

• strengthen the company’s working capital and balance sheet to help assure creditors and suppliers about the continuity of the business.

What if the key person is the owner? Key man insurance can be purchased for him also and can resolve the sole proprietor issues discussed in a buy-sell agreement.

There is no easy formula for determining the value of a key employee. Anticipated profit losses, replacement costs, and a compensation-multiple formula, are typical methods of estimating a loss. Good planning should examine all these concepts to develop a program which is right for the company.

The company is the owner of the policy, pays the premiums and is the beneficiary upon death or disability of the key employee. Premiums are not tax-deductible but the death benefits are received tax free.

Clearly, of the four methods of attempting to fund the financial impact of the loss of a key employee (i.e. wait-and-see, borrow funds if you can without that employee, set-up a savings account, or buy insurance), the insurance option is clearly the best option and the most rewarding to the company.

Any agreements and insurance policies within a business must be integrated with the overall plan and objectives of the business. Careful consideration must be given to the selection of the plan which is right for your business and to the method of funding your plan.

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This material contains only general descriptions and is not a solicitation to sell any insurance product or security, nor is it intended as any financial or tax advice. For information about specific insurance needs or situations, contract your insurance agent. Our articles are intended to assist in educating you about insurance generally and not to provide personal service. They may not take into account your personal characteristics such as budget, assets, risk tolerance, family situation or activities which may affect the type of insurance that would be right for you. In addition, state insurance laws and insurance underwriting rules may affect available coverage and its costs. If you need more information or would like personal advice you should consult an insurance professional. You may also visit your state’s insurance department for more information.