Key man insurance (or key person insurance as it’s often known) operates a little differently from a “standard” life and disability insurance policy. In many insurance policies, the person who is insured is also the policyholder. In other words, they take out the policy for themselves and select the beneficiary –– another person who will receive the insurance payouts in the event of their death or incapacitation. (Many people designate a family member as their beneficiary.) Key person insurance, however, is not structured this way.
One FAQ that we answer all the time is, who is the key man insurance beneficiary? Simply put, a company itself acts as both the policyholder and the beneficiary of a key person insurance policy. This means that the company pays the insurance premiums, but it will also receive any payouts the policy produces. We’ll explain further here:
How Does Key Person Insurance Work?
As we’ve established, key person insurance is a life and disability insurance policy that a company takes out on one of its employees. So, while the professional is the insured person, the company owns the policy and gets all of the potential benefits. Note that the insured person in a key person policy does not pay any premiums nor do they have access to any benefits. Businesses must get approval from a professional to designate them as a key person.
Key person insurance is structured in this way to protect businesses from the unexpected loss of an essential team member. For example, should a small business’s top salesperson suddenly die, the company could lose out on a huge portion of its annual revenue as a result. As such, the company can decide to take out a key person life and disability insurance policy on that salesperson to safeguard against any worst-case scenarios.
What Does Key Person Insurance Cover?
Should a designated key professional die or suffer a disability that leaves them incapable of working for an extended period of time, the business will then receive compensation based on a variety of factors, including:
- Cost of hiring temporary personnel.
- Cost of recruiting, training, and hiring a permanent replacement.
- Losses incurred from sales or revenue on time-sensitive projects.
- Losses incurred as a result of a business’s inability to grow.
- Losses incurred by shareholders or partnership interests.
- Overhead costs.
The cost of key person insurance premiums, the level of coverage required, and the value of the payouts vary from one case to the next. Therefore, it’s a good idea for businesses to review their situation closely to determine if they need key person insurance, and if so, how much it will cost.
One final note: generally speaking businesses should seek only to take out key person insurance policies on individuals who represent very high (if not irreplaceable) value. Typical candidates for key person insurance include CEOs, board members, business owners themselves, and top sales professionals. It is possible, though, to take out multiple key person insurance policies at one time.
Acquiring the right key person insurance policy at the right price could provide tremendous value and protection for your business for years into the future. At Helm Financial, we specialize in this field, and our expert team will help you navigate through any complications or questions that may arise during this process.
Further, we’ve developed a WayPilot Program that ensures we can find you the best price for the best key man insurance coverage every time. Right now, we are the only company buying insurance this way and it saves our clients tens of thousands of dollars every year. Contact us here for more information or to get started with us today!