What Is Keyman Insurance – and Do You Need It?

Insurance is something that gives us the peace of mind we need to carry on with their daily lives and provides us the protection we need in the event the unforeseen happens. The same goes for any business or organization. That’s why ensuring that keyman insurance (also known as key person insurance) is an important part of your corporate policy.

What Is Keyman Insurance?

Keyman insurance can almost be viewed as a life insurance policy for your business’ leaders. Essentially it provides life insurance for a partner, founder or key employee whom the success of the business depends upon. In a small business, this key employee is likely the owner or founder of the company.

How Does Keyman Insurance Work?

With a policy like this, a company purchases life insurance policies for one or more key employees, again, without whom, the business would suffer or possibly event shut its doors. Should these key employees die, the business is the policy beneficiary. This policy helps the company continue running successfully even after losing a crucial member of the team.

How Is the Policy Payout Used?

The insurance company can fund from the policy to help pay any expenses until a proper replacement is found. Debts or other monetary distributions can be paid off with these monies as well. Payroll obligations and/or employee severances can also be paid with these proceeds. Keyman insurance helps give extra peace of mind to business leaders in the event of a tragedy. It also helps to prevent chaos if the company must still close its doors. It will not however, cover any personal/familial obligations—this is where a personal life insurance policy would be advantageous.

Covered Losses (Varies Between Policies)

  • Losses related to when a key person cannot work but hasn’t died,
  • Profit protection,
  • Protections of shareholders or partnership interests. Some keyman insurance policies enable shareholders or partnership interests to be purchased by existing shareholders or partners.

Who Needs Keyman Insurance?

Before we define who needs keyman insurance, let’s first outline who does not. Keyman insurance isn’t necessary if a business entity has just a single employee with no other people who depend on the revenue. For a very small business, the business owner is likely the only person who needs this kind of coverage. After all, this person conducts most of the business’ operations and makes nearly all strategic decisions. Without him or her, the business would likely fail to exist.

How Much Insurance Is Necessary?

The general rule according to insurance experts is to purchase as much as you can afford. Several different agents should be consulted when seriously thinking about purchasing keyman insurance. You can choose between a term, whole or variable policy depending on your business’s specific needs. A good practice is always to price out various premiums and compare quotes. You also need to think of how much money your company would need to survive if it lost one of its key officers. Investopedia suggests asking for the following quotes: $100,000, $250,000, $500,000, $750,000 and $1 million, depending on your business and industry.

Bottom Line

Take a close look at your business. Would it suffer tremendously without one or more of its key employees? Would the rest of your team be in jeopardy and possibly face unemployment in the event of the untimely death of a key executive? If you answered yes to these questions, it’s likely that keyman insurance would greatly benefit your company and give you—the business leader—the security of knowing you’re protected and allow you to focus on continued success.

Have questions? Contact us to speak with a licensed insurance professional.

Disclaimer: All data, information, and opinions provided on this article, newsletter, or blog is for informational and educational purposes only. While every caution has been taken to provide readers with the most accurate information and honest analysis, please use individual discretion before making any decisions based on the information in this article, newsletter, or blog. Georgetown Insurance Service, Inc. is not responsible if its readers happen to experience loss, injury, or damage resulting from its display or use. All information is provided on an as-is basis. This article, newsletter, or blog does not represent the thoughts, intentions, plans, or strategies of any specific Insurance Carrier, Georgetown Insurance Service, Inc. partner or affiliate.
Have questions? Contact Us to speak with a licensed insurance professional.

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