Key Man Insurance and Your Business

key man insurance ratesKey man insurance, more recently known by the politically-correct term “key person insurance”, is a policy that ensures a business still has the ability to recruit, train and replace key staff in the event of unexpected deaths, disability or illness. It is a policy that covers the expected costs associated with the sudden death or incapacitation of a specific member of your company’s staff, and is usually reserved for critical members of the management team, but is also often used as key employee life insurance to cover staff who have critical skills, talents or outside professional relationships that may be difficult to replace on short notice.

As is the case with any form of private insurance, key man insurance requires that you pay regular key man life insurance premiums to maintain the policy’s coverage. However, the premiums for key man insurance are often so low compared to the value of the coverage that they offer that they are considered a negligible cost. Moreover, the premiums are a tax-deductible expenditure that count as a regular cost of doing business.

The policy is also often transferred to the employee as a form of compensation upon retirement as an additional life insurance policy on top of any that they already personally hold. Therefore, key man insurance is also an inexpensive addition to the standard compensation packages that are offered to key personnel upon their retirement.

When Is Key Man Insurance Necessary or Advisable?

All businesses from the largest corporations to the smallest family-run businesses will have key personnel who are critical to the functioning of a department or even the entire operation. The impact of the sudden loss of that key personnel due to death, disability or illness on the smooth functioning of a business can often be catastrophic. The loss of key personnel not only disrupts the regular functioning of a business and any long-term plans for development that relied upon that individual, but it can also be expensive or even impossible to recruit and train a replacement due to the costs, particularly due to the sudden and unexpected nature of the loss involved.

Any enterprise whose basic capacity to function in its normal expected state is reliant on one or more key individuals should protect itself from their loss with key man insurance coverage for those individuals.

The Risks of Not Having Key Man Insurance

The core of almost any business is made up of an entrepreneur, a small group of chosen experts in the industry and the staff they have hand-picked to help bring the vision of the company to life. Often the sudden loss of any of these individuals could be a profoundly detrimental setback for the financial stability, stable operation or reputation of the entire business.

The exact details of the risks involved for those companies not protected by key man insurance will depend upon the nature of the company, its size, its industrial sector and a number of other factors that are impossible to generalize in a brief article. However, most of the risk from not being insured comes from the sudden and unexpected nature of the loss, meaning that those companies that are more reliant on key people and do not have contingency plans in place for their loss are more vulnerable.

The Benefits of Key Man Insurance

Key man insurance may provide general protection against the negative possibilities that can result from the loss of key personnel, but the precise benefits that this protection entails is not automatically clear. Here is a list of the main benefits that keyman insurance policy offers.

• provides the capital necessary to advertise for, interview, train and employ a replacement

• provides a sense of continuity and assurance to staff

• provides assurance to creditors that operations will continue and that their interests in your business will not be affected

• helps to maintain a marketplace presence, which provides your customers with the confidence that your services will not be interrupted

• maintains the integrity of company equity by helping to settle any transfers of ownership resulting from the death of the key personnel

• all policy premiums are deductible and are counted as a part of operating expenses

The beneficiary of any policy payments is the company, as it is the company that pays the premiums and the company who requires the funds to train staff and ensure operational continuity. The cost of the premiums is negligible compared to the value that the key personnel add to the company, so the policy is often turned over to those key personnel when they retire if they are willing to take over the payment of the premiums.

How Much Are Key Personnel Insured For?

The actual amount payable and corresponding premium will depend on a number of factors specific to the circumstances of your company and the key personnel in question. As the owner of the key man life insurance policy, you must attempt to determine the value of the key personnel to your company in the case of their sudden and unexpected death or incapacitation, which will depend on the industry that your company is in, your company size, the role played by the key personnel in your company, the ease of replacing that personnel with a suitable candidate and the cost to operations while the replacement personnel are being selected and trained. Also keep in mind that the immediacy of the event will likely mean that the costs of advertising for, selecting and training replacement personnel will be higher than in the usual case where you have the time and forward notice to find a candidate in a more measured and relaxed fashion. In order to safeguard your business, it therefore important to get key man insurance quote from two or three companies in order for you to evaluate the key man insurance rates being offered.

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