A company may be run by a large group of people with the responsibilities spread out evenly between different departments.
Other companies rely heavily on one or two people.
If one of these highly important people were to pass away, these companies would have difficulties keeping the company in business.
Otherwise stated: They would be screwed!
You would think that most businesses are prepared if something happened to one of it’s key personnel.
A survey by AMA (America Management Association says otherwise finding the following:
Only 14% of those surveyed said that their companies were well-prepared for the loss of a key person.
It’s these type of businesses that would benefit from key man life insurance.
What is Key Man Life Insurance?
The concept of losing a close friend and colleague can be very difficult for business partners to imagine, but they must do so if their plan is to continue operating the business after the death of an important partner. The key man insurance policy is a life insurance policy that business partners can purchase against the possibility of losing a key partner. If these particular people mean life or death for the company, they are exactly the people who need key man insurance.
Owners of small businesses may have life insurance policies that name their spouses or other family members as beneficiaries. These policies take care of the business partners’ personal expenses, such as the mortgage on the house and other debts.
Business partners often purchase disability insurance and make this available to their employees as well. The disability insurance pays the expenses in the event that people experience an injury or are diagnosed with an illness that makes it impossible for them to work and earn their salaries.
However, key man insurance covers a completely different area. With the death of a key person, the key man insurance policy covers the company.
Key man insurance would not be beneficial to every business, but the owners will want to learn more about this insurance coverage to discern whether or not their companies fall under the category of those that would benefit from purchasing a key man insurance policy.
Does the Company Have One or Two People Who Are Highly Important?
The owner of the company would certainly fall under this category. The founders of a business may also qualify as key people. If the loss of some employees would cause the organization to experience difficulties in running the business, this company may want to have key man insurance on these employees.
How Does Key Man Insurance Work?
Key man insurance is a life insurance policy that works much like regular life insurance.
The business will purchase the policy and will also be named as the beneficiary.
This requires that the partners pay premiums that keep the policy active. If one of the key people in the company passes away while the policy is active, the business receives the pre-determined lump sum of money.
This amount may be $100,000, but it could also be as much as several million. The amount that an organization receives will depend on how much the company can afford to pay in premiums. For example, purchasing a policy for a $5,000,000 payment will require that the partners pay more to keep the policy active than if they chose a $100,000 payment.
The partners will not necessarily benefit from a policy that offers them $500,000. The amount of the death benefits will depend on how much money will be required to replace the key person who has died. If the partners in the company believe that $100,000 would suffice, purchasing a policy for this amount is a legitimate choice to make. The partners can also keep their premiums lower if they purchase a term policy that tends to be less expensive than whole life insurance.
What Can the Company Do with the Death Benefits?
What is done with the money will be up to the remaining business partners, but it will be used for the benefit of the business. For example, the business partners can pay any debts that are remaining, or they may offer an amount to their shareholders. Some business partners keep a portion for the business and offer the other to the deceased partner’s spouse.
Who Actually Owns the Policy?
Most key man life insurance policies will have some sort of cash value build up either a whole life policy for universal life. Here’s the biggest misunderstanding I see: The individual does NOT own the policy. The company does and is also the beneficiary.
The company may get a tax deduction in paying for the key man life insurance policies’ premiums, but they can only do so if they add the premiums paid to the individuals taxable income. This might not sound as attractive if your the individual, but most companies will offer the cash value build up as an added retirement benefit.
I had one client that worked for a old company that had bought a $400,000 cash value life insurance policy on him. He had retired from the company and they let him take the policy with him. The cash value was only around $20,000 which he ended up leaving in the policy to pay for the premiums until it expired.
Are you a business that is need of key man life insurance? Give my office a call and we can give you a free review to see where you might need some coverage.
This post was featured in the Cavalcade of Risk blog carnival hosted by AMAXX, Workers Comp Resource Center.