Key Man Insurance is a life insurance policy companies and businesses get on their most valuable employees. The Keyman could be the CEO, the owner of the business, or any other employee critical to the business’s subsistence.
These key man life insurance policies will pay the business the policy amount if the insured key employee dies. This money could be used to hire another person to substitute the person that passed or even hire more than one person.
Businesses usually protect themselves by insuring their most valuable assets like buildings, equipment, etc., but they often forget or ignore to insure the most important assets of all; their key employees. Key Man Insurance is insurance taken by a business firm on the life of an employee (i.e., the Key Man) whose services contribute substantially to the success of the business of the firm.
Objectives of Keyman Insurance Policy
The objective of Key man insurance is to indemnify the business firm from the loss of earnings because immediate replacement of the Key Man may not be possible.
Some of the essential objectives are to protect the interest of the organization against any of the following losses:
- The loss of day-to-day specialized skills.
- The cost of recruiting and training a suitable replacement.
- The loss of customers or sales.
- Delay or cancel any business project associated with the Keyman.
- Recall existing loans guaranteed by the Keyman.
- The loss of opportunity to expand in the future.
- The loss of stable management and good labor relations.
Who Could be a Keyman in a Business?
- Individuals with creative skills or technical knowledge couldn’t be easily replaced. These key employees may be software developers, inventors, scientists, or anyone with a niche talent that cannot easily be replaced.
- Top sales professionals with extensive experience, continually exceeding sales goals, or have great relationships with vendors and high-end customers.
- Executives are responsible for managing the company’s daily operations or are accountable for a particular project or development program.
- Someone whose death or disability negatively impacts the business’s credit or financial solvency.
- Business partners that need to be protected in death or disability.
Key employees are individuals that influence the ongoing success of a business that their premature death or disability could result in the company’s eventual demise.
Advantages of Keyman Insurance
Some of the advantages of Keyman insurance are:
- It is affordable. A keyman insurance policy is inexpensive. It’s a type of term insurance with a premium charged only for mortality.
- Peace of mind to business owners, investors, and creditors.
- The business has the choice of which employees to insure.
- Key employee insurance policies are easy to acquire
Bottomline: Key Man Insurance; a Simple Business Protection Policy
Keyman insurance is a simple solution to a potentially catastrophic problem. It is an inexpensive tool to protect a company or other business entity from the damaging effects of losing a key employee or business owner.
It is also a logical way to ensure that a business has options if a key employee dies or is disabled. The possibilities provided by Keyman insurance may include hiring and training a replacement employee, paying the business’s debt and liquidating the company, or selling the company at fair market value.
Without keyman insurance, most businesses have no option other than to close the business or sell it to a competitor at a significantly reduced distressed price.