Imagine a scenario where your business could easily handle the unexpected departure of that one indispensable individual. Well, this isn’t just a pipe dream!
Key person life insurance serves as a financial safety net, guaranteeing that if something were to happen to a vital team member, your operations would continue without missing a beat.
By delving into this subject, you’ll gain comprehensive knowledge about keyman insurance and its significance for your business’s stability and continuity.
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- What is the purpose of key person life insurance?
- Who should be covered by keyman insurance?
- How much keyman life insurance do you need?
- How do you establish a new business life insurance policy?
- What is the best way to buy key employee coverage?
- How do we help entrepreneurs with their life insurance needs?
- FAQs: Key Person Life Insurance.
What is Key Man Insurance?
In business, several types of insurance are essential to protect the company in an emergency. One type of insurance that is particularly important for a small or medium-sized business is keyman life insurance.
Key man life insurance, or key person or key woman insurance, is a policy that small companies take out on the lives of their owners or key executives.
In the unfortunate event of something happening to essential workers, such as their passing away, the policy pays the company a tax-free lump sum.
In most cases, a keyman policy is not tax-deductible as a business expense for your company.
What is the Purpose of Key Person Insurance?
What is the Purpose of Key Person Insurance?The purpose of key person insurance is to protect businesses from significant financial losses if an essential person within the organization were to pass away.
It is widely recognized that the sudden death of a partner, owner, or essential employee could devastate business operations.
This type of insurance serves as a safety net for your business, providing crucial financial support in the event of losing a valuable team member.
It acts as a buffer, ensuring your business can function smoothly even during unexpected and challenging circumstances.
The death benefit from key person life insurance can give your company valuable time to find a suitable replacement or implement alternative strategies to save or transition your business.
The infusion of liquid funds helps surviving partners maintain stability by covering expenses such as employee salaries, vendor payments, and loan obligations.
Having key man life insurance in place can safeguard your business’s stability and resilience when faced with unforeseen events affecting vital individuals within your organization.
What Does Key Man Insurance Cost?
- Select Duration
- Select Amount
- Press Get Quote
Who Needs to Have a Keyman Policy?
Who Needs to Have a Keyman Policy? According to a survey of business owners by the National Association of Insurance Commissioners, over 70% of the small firms surveyed said they depended on several important people for their company’s success.
Surprisingly, only 22% of these entrepreneurs have an active keyman life insurance policy.
As a founder or crucial employee, you understand the vital role your skills and knowledge play in the prosperity of your organization.
This is especially true for small specialty businesses and non-profits that heavily depend on the expertise of specific individuals.
If your small business has any indispensable employees, it is essential to consider purchasing key-person life insurance.
Who is a Candidate for Key Man Coverage?
Who is a Candidate for Key Man Coverage?- Owner: The person who started the company and is still working in the business’s day-to-day operations.
- Sales Executive: Salespeople have valuable contacts and are responsible for attracting and keeping key customers.
- Technical Employee: A person with unique knowledge of the company’s operations, which are hard to replace or duplicate without considerable training.
- Director/Investor: They have guaranteed loans or provide startup capital to the company.
- Pastor or Charity Director: A dynamic leader with a unique vision for a non-profit organization.
When a crucial employee dies, it inevitably leads to declining revenue and sales. This unfortunate event also results in losing customers, who often turn to competitors.
Companies facing financial difficulties may struggle to meet payroll obligations, leading to employee turnover.
Similarly, churches and small charities understand the challenge of replacing pastors or key leaders after their demise.
To ensure the continuity of these organizations’ work and support for people in need, it is essential to have key-person life insurance for pastors or charity leaders.
Moreover, having life insurance on key executives allows businesses to compensate for lost revenue, train new employees effectively, and settle outstanding loans.
Obtaining this insurance is often required for businesses seeking business loans, as it offers protection against unforeseen circumstances that could impact the owner’s ability to fulfill financial obligations promptly.
Key Person Valuation Methods
Key Person Valuation MethodsOtherwise, the amount of key person coverage is directly linked to an individual’s value to a company, extending beyond just their salary.
It also encompasses employees’ sales generation and revenue contribution, significantly impacting the business’s success.
Determining coverage requires a strategic approach and a thorough understanding of financials. It is not a matter of guesswork but rather involves using established formulas based on multiples of salary or profit contributions.
However, it’s important to note that these formulas may vary depending on the specific circumstances of each company.
We often use the business owner’s recommendation, their accountant’s advice, or various valuation methods to help determine the proper amount of coverage.
How is key man insurance calculated?
- Contribution to Earnings: The contributions to the earnings method will estimate the key employee’s contribution to the company’s bottom line.
- Multiple of Income: Many financial advisors use the multiple income approach, multiplying an employee’s salary by five to seven.
- Replacement Cost: Another rule of thumb for insuring any key employee is to evaluate how much it would cost to replace this vital individual.
Many life insurance carriers also provide formulas to help business owners evaluate a crucial employee’s worth.
So, the proper amount of key-person coverage will depend on the key employee’s replacement cost or economic value to the company.
After the proper death benefit is determined, our goal is to find the best plan and price available in the marketplace.
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Keyperson Insurance Case Study:
Hugh is a successful executive at his manufacturing company.
A $2,000,000 life insurance policy is purchased based on his economic value to the business to ensure the company’s continued success.
In Hugh’s death, the keyman insurance policy is activated, and the $2,000,000 death benefit is utilized to find a replacement and compensate for lost revenue.
The beneficiary and owner of the insurance would be his company.
Key Man Life Insurance Setup
Key Man Life Insurance SetupBy following these steps diligently, you can secure a keyman insurance policy that safeguards your small business against unforeseen circumstances involving critical team members.
- Identify Key People: Determine which employees play a vital role in the success of your business and whose absence would significantly impact its operations.
- Calculate Death Benefit: Assess the coverage required to cover expenses like finding and training a replacement, settling debts, and managing other potential costs.
- Select a Policy: Term life provides coverage for a specific period, while permanent life covers individuals throughout their lifetime.
- Select an Insurer: Research various providers to find one that offers suitable policies for your needs. Consider costs, coverage options, and reputation when making this decision.
- Apply for Coverage: Once you’ve chosen an insurer, complete their application process by filling out the necessary forms and undergoing any required medical examinations.
- Pay Premiums: As an employer or business owner, you must pay premiums regularly to keep the policy active. The premium amount will depend on factors such as age, health condition, and occupation of the insured key person.
- Policy Review: It is essential to review your policy to ensure it adequately aligns with your business requirements. Update it if there are changes in roles or responsibilities related to the key person covered by this insurance.
Buying Key Person Life Insurance
Buying Key Person Life Insurance The cost of key man life insurance is determined by factors such as policy type, death benefit, and the employee’s health.
Younger and healthier individuals may only need to participate in a phone interview to secure coverage.
However, older individuals might be required to undergo a medical examination for a new policy. Older business owners and employees will have higher premiums due to their age.
When choosing keyman coverage, you must also decide between a cost-effective term life insurance policy or a pricier permanent life insurance option.
key man term life insurance
key man term life insurance Term life insurance plans are a popular option for funding key employee insurance.
They provide coverage for a specific period, typically between 10 and 40 years, making them more affordable than permanent life insurance.
Many businesses opt for term coverage when insuring key employees, as it can be tailored to align with important dates like retirement or projected timelines.
This allows companies to protect their valuable employees without breaking the bank on premiums.
It is often helpful to compare prices on the different term durations to understand better which plan would be best for your key employees.
To showcase costs, we’ve gathered examples of key person life insurance rates for males at different ages and durations, with varying death benefit amounts.
How Much Does It Cost to Insure a Key Man?
| $500k | $750k | $1mm | |
| Age | 10 | 10 | 10 |
| 30 | $15 | $20 | $22 |
| 40 | $19 | $25 | $29 |
| 50 | $42 | $64 | $75 |
| 20 | 20 | 20 | |
| 30 | $21 | $27 | $33 |
| 40 | $28 | $41 | $52 |
| 50 | $73 | $108 | $142 |
| 30 | 30 | 30 | |
| 30 | $32 | $47 | $58 |
| 40 | $53 | $76 | $99 |
| 50 | $125 | $185 | $252 |
At Affordable Life USA, our goal is to help entrepreneurs find an affordable term insurance plan that meets their company’s coverage needs.
Our easy-to-use keyman insurance calculator lets you quickly compare term insurance quotes and find the perfect policy for your business.
With our online tool, you can save time and effortlessly locate the most affordable keyman insurance quotes for your specific requirements.
Permanent key man Life Insurance
Permanent life insurance is a form of coverage that offers lifelong protection and includes a cash value component.
This cash value can be accessed through policy loans or withdrawals while the policyholder is still alive, making it a valuable asset for individuals and businesses alike.
If a company owns the policy, the cash value can even serve as collateral for business loans. In addition, if a mutual insurer issued the policy, businesses may receive dividends based on their ownership of the policy.
Permanent life insurance can also be used as an employee benefit since the accumulated cash value can eventually be transferred to employees. This makes permanent coverage appealing for successful businesses with sufficient financial resources.
Various types of permanent life insurance are available, including whole-life with fixed premiums and cash values and universal life with more flexible premiums and cash values that fluctuate over time.
Life Insurance for Business
We have developed a disciplined process to assist successful companies with their personal and small business life insurance needs.
When reviewing your key man insurance, we can often look at other business planning strategies. Here are a few ways we can typically assist small business owners with life insurance.
- Buy-sell Life Insurance: This insurance safeguards small businesses in case of a key employee’s death. It is an effective tool for business owners to execute buy-sell agreements by offering financial support to the deceased owner’s family and the business. This insurance provides liquidity, ensuring smooth transitions and stability during challenging times.
- Executive Bonus Life Insurance: Company owners provide executive bonus plans to attract and reward top executives. The business will offer a bonus to cover the premiums of a life insurance policy that will benefit the employee’s family. The employee will be the policy owner, and their family will receive a tax-free death benefit.
- Business Loan Life Insurance: Banks commonly require a term insurance policy for the business owner to secure a loan. An active life insurance policy enhances your company’s credibility and alleviates stress for owners and lenders.
We recommend discussing your planning goals with one of our specialists because key-person insurance is not a one-size-fits-all solution.
If you want to examine your business life insurance needs, do not hesitate to contact us today!
FAQs: Key Person Life Insurance
FAQs: Key Person Life InsuranceWhat is the official keyman insurance definition? Companies purchase a key person life insurance policy on the lives of owners or top executives. These key people play a vital role in the company’s profitability and have an economic value to the business. The company pays the premiums and is designated as the policy beneficiary.
How much key man insurance do I need? Life insurance coverage for partners or executives is often based on a multiple of their salary. These employees drive the business’s success beyond their salary alone. So, consider factors like sales generation and revenue contribution and their overall value to the company.
Is key person life insurance tax deductible? While the premiums for key person life insurance are typically not tax-deductible, the proceeds from the policy are usually exempt from income tax. This means that if a vital employee were to pass away, any death benefit received by the company would be free from taxation.
What is the difference between keyman and life insurance? Life insurance is intended to offer financial assistance to your family or dependents if you pass away. Conversely, key person insurance safeguards your business if a crucial employee or executive dies.
Business Life Insurance Topics
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Affordable Life USA is a leading independent insurance agency offering comprehensive life insurance solutions to clients nationwide.
Eric Van Haaften, LUTCF
1-877-249-1358
