Key Man Life Insurance
Key man insurance is life insurance on the life of a key employee or company's founder, purchased to help reimburse an employer for the economic loss caused by the death of the employee. This is typical in a small business so it is vital that you maintain Key man insurance on these individuals.
Key Man Insurance Policy Types:
Key Man Insurance 101 (How it works):
Key man life insurance works like individual life insurance - when the insured dies, the policy pays out a benefit. Instead of an individual insuring himself or a family member, however, the business owns the policy and pays the premium. If the insured dies, the business is the beneficiary and will receive the policy payout.
An insurance agent appraises the person you want to insure and sets a premium on that person. The premium is based on the current health of the employee, his (or her) health history, age, and salary. Keep in mind that not everyone can be covered - the insurance company has the right to deny coverage.
To ensure the livelihood of the company, the money can be used to pay off debt and keep creditors at bay, find a replacement for the deceased, buy out the deceased's shares in the company (buy-sell agreement), or even help to supplement the income of the deceased's family.
The founder or owner of a business shouldn't immediately be considered the right or only candidate for a key man life insurance policy. Rank is less important than who are the critical employees in your business. Your business couldn't function day to day without the founder, but it also may not be able to survive without your revenue-generating sales team.
To determine who needs key man insurance, take a look at your business and think about who is irreplaceable. In many cases within a small business the company's founder who runs the company together, manage the books, manage the employees, and handle the key customers. If that person is no longer here, the business pretty much stops
If you still think you and your employees are invincible and key man life insurance isn't for you, you may be forced to reconsider. Oftentimes investors and lenders will insist you purchase a policy to protect their own investment. Another reason to consider? Policies are very affordable.
Key Man life insurance polices are set up as permanent polices that build cash value over time, however, a smaller business can opt for a more affordable term life policy where premiums are paid until the employee retires or leaves the company, and then it can be transferred to that key person's replacement.
In general, coverage ranges from matching the key person's base salary to as high as 15 times his salary - or it can be a flat amount. Most small businesses find they do best with a payout of two to three times the key employees' salary, at a cost of less than $1,000 per year for the premium. A permanent policy will cost more, about 3 percent the face value of the policy.
Key Man life insurance is an affordable way to ensure the future of the business these critical employees you're insuring have worked so hard to make successful. back to top
Business Continuation Plan - Put together a plan detailing how your business will function without key employees. It's helpful and usually required by your insurance company.
Disability Key Man Life - Your business could suffer just as much if a key employee becomes disabled. Look into key man disability insurance policies.
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Three Valuation Methods
- Multiple Compensation Method - This is a simple method of calculating key man worth. It assumes that an
employee's value is accurately reflected in his or her total compensation. This is a simple method of calculating key man worth. It assumes that an
employee's value is accurately reflected in his or her total compensation.