One of the most popular life insurance policies is the key person one, which seems to be the most often chosen among successful executives. It is also called the Key man life insurance for business owners.
What is, in fact, the key man or key person life insurance?
It is a policy that offers a capital in the shape of a death benefit, in case a key person should die. This extra capital helps surviving business partners maintain the business, since they are able to pay the vendors, the employees and also to make loan payments. And indeed, most organizations realize that in case a partner/owner/key person would suddenly die, their business would fall apart. As such, a key man life insurance policy is bought by the company for the life of a key person. However, the company remains the policy owner, the beneficiary and the premium payer.
Who can be the key man?
There are many key people in the business:
- Sales executive – The sales executive has important contacts, plus the responsibility of attracting and keeping essential customers for the business.
- Owner – naturally, the owner is one of the key persons of the organization. He is the one who started the company and is working daily on the operations required by the business.
- Technical employee – this is the person that has unique knowledge about the operations developed in the company. They are hard to replace, and a replacer would need lots of training.
- Investor/director – they guaranteed loans or offered the capital required to start the company.
The amount offered for the key man coverage is proportional to the economic value held by the person within the company. Insurance companies often times use the advice of an accountant or the recommendation of the business owner in order to find out the proper coverage amount.
Types of Insurance
There are several types of insurance. Your business can buy a key person coverage either as a term life insurance or as a permanent one. A term policy has the benefit of lower premiums for funding the key man policy. It can be written for 10, 20 or even 30 years. A permanent policy can be a universal or whole life one. It grows a cash value in the policy and lets your business take ownership of the funds, which can be further accessed in the future.
Both types of policies represent business assets and can even contribute to the creditworthiness of your company if you need commercial borrowing. Usually, the premiums that are paid to the insurance company are non-deductible. At the same time, the death benefits that are paid to the company are non-taxable.