Key Man Insurance: The Business Protection Most Small Business Owners Overlook
What happens to your business if your most valuable employee dies or becomes disabled? Key man insurance provides the cash to survive that loss. Here is how it works.
Every business has key people — the ones whose loss would devastate the company. It might be the founder, the top salesperson, the technical expert, or the person with the critical customer relationships. Key man insurance protects the business from the financial impact of losing that person.
What Key Man Insurance Is
Key man insurance (also called key person insurance) is a life insurance policy owned by the business on the life of a key employee. The business pays the premiums and is the beneficiary. If the key employee dies, the business receives the death benefit.
How the Death Benefit Is Used
The death benefit can be used for: recruiting and training a replacement, covering lost revenue during the transition, paying off business debts, reassuring customers, suppliers, and lenders, and buying out the deceased employee's ownership interest.
How Much Coverage to Buy
A common formula is 5-10 times the key employee's annual compensation. For a key employee earning $200,000/year, that is $1-$2 million of coverage. The right amount depends on the employee's contribution to revenue and the cost of replacing them.
Key Man Disability Insurance
Key man disability insurance protects the business if a key employee becomes disabled and cannot work. It is separate from key man life insurance and equally important — disability is more likely than death for working-age employees.
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