Key-Man Insurance: Protect Your Business!
Key-man insurance can help protect your business.
Let me explain how…
Let’s say you have a business you own. You have a key CEO or manager that your business absolutely depends on for the success of the business.
That person is your “key-man.”
Have you considered taking a life insurance policy out on them to help insure the protection of your business?
In the untimely death of that “Key-man” will your business survive?
For this reason, let’s talk about why you may need to consider a policy like this.
Also, lets go over the pros and cons.
Key-man insurance policy: basics to know
For example, this type of policy is often taken out by a business owner to cover a loss of a valuable employee, in the event of an unexpected death.
The death benefit from these policies can help financially to continue to run your business.
The benefit may also cover salaries and such until a replacement member or employee can be found.
This Key-man may be;
- Director of sales
- IT specialist
- Project manager
- Someone with a specific skill set
- Business owner
Typically 1-20 years is what most businesses need.
To calculate the amount of coverage needed, we often ask these questions:
- What is the percentage of the businesses profits that this key-man contributes?
- How many years would it take to find a replacement?
- Another common method is to take the salary/benefits of this key-man and multiple it by 5-7x.
What happens is that in the event of a death the life insurance company will pay out the death benefit to the beneficiary- in this case, the business.
In effect protecting this business and the employees until a replacement can be established or a new business model plan instituted.
Some keys points consider:
Key-man insurance is not typically tax deductible, however, because premiums are paid after-tax, the death benefit would be paid to the company free of income tax.
No deductions are allowed on businesses who own a key-man insurance policy- the rational is that because these policies when paid out are income tax free, the premiums will be taxed.
Keyman Policy; Pros
Protecting your business in the event of death to a key employee.
- Staff and employees
- Income loss
- Business itself
Gives you financial resources to recoup after the loss of a key employee.
Gives you time to:
- Replace that employee-may takes years to find the right one.
- Stay up on your business expenses till that income revenue can be recouped.
- Plan a restructuring of the company and this allows the flexibility to do it without laying off staff.
Lenders and banks can sometimes require a key-man policy to help protect their investment in your company.
Helps lower the risk for lending institutions.
Keyman Policy; Cons
If your business has enough money in assets to cover the loss of an important employee- you don’t need to spend the money on a policy.
Typically you want 5-7x the salary or profits of that employee in savings to allow you time to replace that key person, if needed.
If all your employees are replaceable- you probably don’t need a policy like this.
Maybe the positions you have are easily fillable in a timely manner. Your aren’t concerned about lost revenue for the short term as someone can be trained fairly quickly.
Small businesses are always looking at ways to get tax-deductions. Often life insurance policies where the beneficiary is the company do not qualify for tax deductions.
If your company is slowing down with plans to close or maybe you plan on selling your company soon, a policy like this may not be needed.
Final Thoughts; Take Home Message
Keyman insurance policies help protect businesses with 1 or more important employees that are not easily replaceable. This person is crucial for the success of the business.
These types of policies pay out to the beneficiary- in this case the company itself in the untimely death of this critical employee.
Death benefits will help cover the cost of the lost revenue until a new employee with that skill set can be found. Sometimes a business model restructure is needed and this financial replacement allows time to do this.
Often these policies help protect other employees in that company. It may also cover the loss income to the owner- offering peace of mind.
We are here to answer all your questions regarding this and to inform you of things you may not even know to ask.
Let us be your guide to help protect your business. We use policies like these for our small business, we are the experts.