Key Man Life Insurance: What Is It and Who Needs It?

Often, the difference between successful and unsuccessful businesses can come down to the determination and vision, as well as financial backing, of primary individuals within the company. These individuals become key to the success of the company, as a whole. But, what happens if that person suddenly and unexpectedly dies? A crew without a captain will sail off course, if they aren’t unified in a plan of succession.

Morbid as it may be, it is a fact of life and an unavoidable topic for businesses. Although you can never replace a “key man” you can propel their life’s work to greater heights through insured financial support and agreed-upon courses of action. Still, none of this will miraculously occur without careful planning and frank discussions with all invested parties. Let’s explore some of the FAQs of this type of insurance to see if your business is a likely candidate and what steps you can begin to take to secure your legacy.

Which Businesses Benefit From This Kind of Coverage?

By and large, small and developing businesses are the most likely candidates, as much of their revenue may be tied to their growth and expansion, whereas established businesses may have insulated themselves for the potential of a key man loss. Small business models often rely on re-investment, both financially and individually as part of their winning strategy. They are dependent on certain individuals and their contributions to make the machine operate correctly.

How Does the Coverage Work and How Much Is Needed?

Just like most insurance, a policy is acquired, the premium is paid and, if the policyholder passes, the company collects and is hopefully given a lifeline to manage the loss of their key person. Which brings us to the question of how much insurance is needed. For most businesses, the worth of a key man needs to be assessed, based on how much they add to the company, as a whole. Therefore, the more key they are, the more coverage the company should purchase. And don’t just consider what they bring to the company, but what the company would need to survive, if this person was suddenly lost. Overall business debt, investors’ returns and employee retention are some of the most common concerns and questions businesses purchasing this insurance will discuss.

What Are the Potential Drawbacks?

Overall, key man life insurance is an excellent safety net for smaller businesses, but there are some potential disadvantages to be considered. or instance, premiums aren’t tax deductible and, when a key person passes, creditors could make a claim to the premium pay out. In addition, if a key man leaves a business, their coverage can’t travel to their new business. However, there are some options becoming available to alleviate the potential of wasted premium payments. Talk to an agent today to see what your business’ options might look like.

Key man insurance is an excellent way to safeguard your small or medium-sized business from the catastrophic loss of a vital member of the business. It may be something that people avoid discussing because of the sensitive nature of the decisions, but it is much less comfortable or possible, when an actual loss occurs. Have these discussions and make rational decisions when all parties can contribute and develop a plan for the near and distant future of your company.