Key Man Insurance: Protect Your Business From Disaster

Key man insurance is special insurance coverage for key people within a company. When tragedy strikes, key man life insurance or key man disability insurance can mean the difference between bankruptcy or success for a company or organization.

Key man insurance: protect your superstars

There may be one or more key people in your company that keep business afloat. A top salesperson, an executive, or the business owner himself, can all play vital roles in the success of the company.

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If an untimely death or disability strikes, insurance coverage can help the company survive. Business owners, as well as shareholders, have peace of mind knowing that the sudden loss of a major player will not shut down operations.

Business will be able to financially survive the loss, until an adequate replacement can be found.

What is Key Man Insurance?

Most people, even trained insurance agents, mistakenly believe key man insurance is only life insurance. Life insurance is an important component, but disability coverage is equally important.

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Key Man Life Insurance
Key Man Disability Insurance

While sudden death due to an unfortunate accident is a constant threat, the risk of injury or illness leaving a key player disabled is just as great.

To have adequate protection against a serious disruption of business, a company should seek life and disability insurance for the major income generators and top executives. Many businesses, especially the smaller ones, rely on the specific skills, talents and experience of a few individuals.

The long-term survival of the company depends largely upon these people. The sudden loss of one of these people can have severe effects on the company.

Key man life or disability insurance is designed to protect businesses in these situations. The insurance money provides financial stability for the company during this period of adjustment.

When a company loses the special skills and talents of a key player production may suffer, sales may drop, and the company can end up in a downward spiral that's impossible to recover from.

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Then there is the significant time and money spent on finding an adequate replacement. A key man can not just be picked out of a hat. He or she must be someone that can step into the now-vacant position with little training, and be able to literally pick up where the other person left off before tragedy struck.

Key man life insurance: protect your company's human assets

How Does Key Man Life Insurance Work?

Business owners secure life insurance to protect their families from financial hardship in the case of death or disability, and business insurance to protect lost assets in case of fire, theft and other hazards.

Key man disability or life insurance provides funds to protect the company against loss of income generated by a key player and to cover costs involved in finding an adequate replacement.

The insurance premiums for key man insurance is quite small compared to the potential losses the company could face in the event of death or disability. The business obtains the policy, owns the policy and pays the premiums. The business is also the beneficiary.

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Key Man Life Insurance
Key Man Disability Insurance

The insurance premiums paid by the company are not tax deductible, but the proceeds received are generally exempt from taxes.

Unlike personal insurance, key man insurance is designed to protect the business, not the person. In case of death or disability, the money goes directly to the company which can use the proceeds any way it sees fit.

Usually, funds will be used to cover lost revenue the key person would normally generate for the business and to find a replacement.

Companies can often purchase a return of premium rider. This rider typically has a minimum 15 year term. After 15years without any claims, or depending on the contract, the company can cancel the policy and receive all the premiums paid for the term of the coverage.

This return of premium rider can also be used as part of a tax strategy for company owners.

Benefits of key man insurance include:

  • Heirs of the business owner are able to meet the company's financial obligations without hardship or resorting to dissolving the business
  • Reassures creditors and customers that business will continue as usual
  • Relieves financial strain the company could face without the skills of a key player

Businesses can be dramatically affected by the loss of key players. Key man life or disability insurance can lessen the financial impact.

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