Does Your Business Need Key Man Life Insurance?

Because of the many details that are part of running a business, the important issue of key man life insurance can become overlooked. This is unfortunate, because companies of every size often rely on one key individual, or a few top executives, to keep everything running smoothly.

Farsighted companies that are aware of the need invest in what is called “key man” life insurance to ensure that they will survive if the unexpected happens. Under this type of policy:

• The business is the beneficiary, and also pays the insurance premiums.
• The payout provides the company with sufficient time to find a replacement for the deceased individual or develop other procedures that will enable them to stay in operation.
• The company may also use the funds to make distributions to its investors, offer severance pay to its employees, pay its bills, purchase the shares of stock the “key man” held, or even phase out the business in an organized way, instead of dealing with bankruptcy.

There is no simple method for calculating what key employees contribute to a business by their very presence, coupled with their skills, expertise, contacts, and experience. Since replacements cannot be found quickly, planning for backup on an interim basis will help carry a business of any size through this critical period. In addition, many investors will not deal with a company when they find that this type of insurance coverage is lacking, and you may even gain investors once they know you have it.

Consult with at least two insurance agents in order to compare rates, and opt for term insurance. (Both whole life and variable life require higher commissions and premiums.) In any case, the cost of coverage is relatively insignificant, compared to the loss your company could suffer without it.

Keep the following in mind as you determine your company’s insurance needs:

• Because life is so unpredictable, remember that you will also want to purchase key man disability insurance.
• Remember that the amount of coverage that available to you will be based on an accurate and verifiable assessment of the loss your company would suffer in a given set of circumstances.
• As a rule, the payout received from a key man life insurance or disability policy is not taxed, and the premiums are not tax deductible.
• It usually takes from 4 to 6 weeks for a policy to be approved.