Key Man Insurance: Safeguarding Your Business’s Most Valuable Assets

Shawn Plummer

CEO, The Annuity Expert

In a world where businesses are ever-evolving, there are certain constants that ensure the smooth running of a company. One such element is the presence of a key person, an employee whose contribution is paramount to the success of the enterprise. But what happens when the unforeseen occurs? Enter the world of key man insurance.

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What is Key Man Insurance?

Key man insurance, also known as key person life insurance or key woman insurance, is a form of business life insurance that companies take out on crucial employees. This ensures that the company is financially protected if a significant employee unexpectedly dies.

Example: Imagine a business owner who relies heavily on a particular employee for substantial sales. If this employee were to pass suddenly, the business might face lost sales and a dip in profits. The company can weather such a storm with key man insurance, using the insurance proceeds to offset these financial setbacks.

How Does It Differ from Other Life Insurance Policies?

While terms like group life insurance or term life insurance may sound familiar, key man insurance is distinct.

  • Key Person’s Contribution: The primary focus here is on the individual’s importance to the business rather than the person’s salary or employee’s compensation.
  • Beneficiary: Unlike other life insurance policies where family members typically benefit, the business owns and is the direct beneficiary in key man insurance.

Example: An insured employee in a small business with a term life insurance policy will have their family receive the death benefit upon their demise. In contrast, with a key man policy, the business gets the payout if the key employee dies.

Key Employee Insurance

Benefits and Tax Implications

  • Financial Protection: A company’s profits are often linked to its key employees. Should a key person die, the company can utilize the policy’s death benefit to cover lost profits, pay off company debts, or even fund the search for a replacement.
  • Tax Benefits: While the premiums paid for key man insurance are not tax deductible as a business expense, the insurance proceeds are typically received free of income tax. However, consulting with a financial professional is always recommended to understand the finer details of tax implications.

Example: A key employee’s death may jeopardize the company’s ability to repay a business loan. The key man insurance proceeds could help ensure that the business remains in good standing with the financial institution, all while avoiding detrimental tax impacts.

Key Person Insurance

Factors to Consider When Choosing Coverage

  • Monetary Value of the Employee: The insurance coverage should ideally align with the key person’s contribution to the company’s profits or the cost of replacing them.
  • Medical History: Like any life insurance policy, the insured person’s health plays a role. A healthy employee might fetch better policy terms.
  • Company’s Corporate Structure: Sole proprietors, small businesses, or larger corporate structures will all have varying needs.

Example: If a valuable employee contributes annually to 40% of a company’s profits, then the insurance coverage should reflect this significant contribution, keeping in mind any associated costs of recruiting a replacement.

Key Man Insurance

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Key Person Life Insurance

Next Steps

Certain threads – or key persons – hold it all together in the intricate tapestry of business operations. Key man insurance is an indispensable tool in ensuring that the abrupt loss of such an individual doesn’t spell doom for the company. As with any financial decision, it’s paramount to research, consult with financial professionals, and consider the unique needs of your business. With key man insurance, companies can shield themselves from the unpredictabilities of life, ensuring that they continue to thrive even in the face of adversity.

Insurance For A Key Employee

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Frequently Asked Questions

Who benefits from key man insurance?

Key man insurance primarily benefits businesses that rely on a few critical individuals for their success. If one of these key people passes away or becomes incapacitated, the policy provides a financial safety net, helping the company navigate the transition and potentially avoid dissolution.

What is key man risk?

Key man risk refers to the vulnerability a business faces when its success is highly dependent on a single individual, often a founder or top executive. If this “key man” leaves or becomes incapacitated, it could significantly impact the company’s performance, stability, or future growth.

*Disclosure: Some of the links in this guide may be affiliate links. I may receive a commission at no cost to you if you purchase a policy. It helps us keep the lights on!

Shawn Plummer

CEO, The Annuity Expert

I’m a licensed financial professional focusing on annuities and insurance for more than a decade. My former role was training financial advisors, including for a Fortune Global 500 insurance company. I’ve been featured in Time Magazine, Yahoo! Finance, MSN, SmartAsset, Entrepreneur, Bloomberg, The Simple Dollar, U.S. News and World Report, and Women’s Health Magazine.

The Annuity Expert is an online insurance agency servicing consumers across the United States. My goal is to help you take the guesswork out of retirement planning or find the best insurance coverage at the cheapest rates for you. 

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