While life insurance can provide a much-needed financial security when the sole breadwinner passes away, Key Person Insurance, also known as Keyman Insurance, can do the same for a company.
Key Person refers to an individual—an employee, proprietor, partner—on whom the business is depending for success.
What is Key Person Insurance?
Talented individuals are becoming rare these days and businesses are highly depending on them for success, especially small businesses. Any particular individual who is the key driving force for the success of the company and whose absence could pretty much end the company, is worth taking Key Person Insurance on.
Under Key Person Insurance, a business becomes a beneficiary and gets insurance payoffs when that person dies unexpectedly. The insurance payoff provides financial security and allows the company to stay afloat for a certain period, until another talented individual is found to takeover.
It prevents businesses from immediate winding up.
How does Key Person Insurance work?
In case of Key Person Insurance, the insurance purchaser and the premium payer is the business. The company can choose anyone as the Key Person who had particular set of skills or has important relationships with suppliers. There can be multiple Key Persons in any organization.
The premiums paid on Key Person insurance is tax deductible, which means that a business can treat premiums as a business expense and lower their tax payments.
What happens when a Key Person Quits?
If a Key Person quits the company, there are several things that a business can do.
One, the business can stop paying premiums and end the policy. Two, they can transfer the Key Person policy to the other employer if they are interested. Three, the business can also accept the policy’s surrender value if there is a provision in the contract.
Insurance Coverage
Key Person Insurance is generally not offered to businesses that have declining profits and turnover; however, it solely depends on the discretion of the insurance provider. The age limit and coverage term are other factors that vary provider to provider.
One thing is for certain though that businesses running in loss are guaranteed never to get Key Person Insurance.
The coverage of Key Person Insurance is generally lower of:
- Key Person Annual Compensation x10
- Average Gross Profit of the business in the past three years x3
- Average Net Profit in the past three years x5
If you’d like to learn more about Key Person Insurance and benefits, get in touch with us. We are one of the leading employee benefits consultants and will help you get the best key person insurance policy for your company.
