Insurance protects your business, your family and your personal well-being in case something bad happens. And most would agree that the worst event that can occur is loss of life. Having insurance policies that can protect your employees, their families, and your business in these unfortunate times can be a small consolation in a tragic situation that makes the event a little less damaging for everyone.
As a business owner, you have options when it comes to purchasing life insurance. You can provide policies to all employees, but you can do more. But which policies should you get key man versus life insurance?
Key person insurance, formerly known as key person insurance, insurance industry wake-up snaps, is a special type of insurance that can be purchased for select individuals. We’ll break down the differences between traditional life insurance and this specific type of coverage. Let’s start with the guy you probably already know something about:
What is a insurance of life?
A standard life insurance policy is something that virtually every employer offers. Life insurance is a contract between a person and an insurance company. If an employer offers life insurance, it is considered a benefit to the employee, since the policies may be available at a lower price when purchased in bulk compared to when purchased as a single entity.
If death occurs, the insurance company will pay beneficiaries a lump sum known as the death benefit. There are two main types of life insurance classifications:
- Term Life Insurance: This type of life insurance provides coverage for a specific period of time, usually between 10 and 40 years, the term is usually tied to the anticipated date of retirement.
- Permanent or whole life insurance: Permanent policies provide coverage for the life of the insured and accumulate value as a portion of the premiums are deposited into a cash value account over time.
What does life insurance cover?
Life insurance generally covers most causes of death, including: natural causes, accidents, homicide, and suicide. In the event of death, the money will be paid directly to the beneficiaries. They can use the money however they want, but common uses include things like:
- Estate taxes and funeral expenses
- Cover basic living expenses
- Pay off household debts
- Lost Income Replacement
- Financing a child’s education
- Supplementing retirement savings
What does life insurance not cover?
In some circumstances, life insurance policies will retain a payment to beneficiaries. Reasons can include things like:
- A life insurance policy is expired
- Fraudulent or criminal activity was committed on behalf of the policyholder
- The policyholder’s death involved risky behavior, such as participating in extreme sports.
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What is Key Person Insurance?
Something similar to life insurance in practice, it is a policy that is paid at the time of the death of an employee, key person insurance is paid to the company, since in this case it is the policy holder. It is a form of company owned life insurance (COLI). However, there are times when both the company and family members receive a payment.
Simply put, the company owns the policy, pays the premiums, and is the beneficiary. Key person insurance is a life insurance policy that a company purchases for its most valuable employee or employees.
The employee has to give consent. In addition to death coverage, a policy may also include a rider for disability coverage. If a key person dies, the company collects a death benefit. The purpose of this type of insurance is to protect a business in the event that it loses an invaluable person to its business due to death, rather than voluntary termination or departure.
What does key person insurance cover?
Key person insurance can be used by a business to recover after the loss of a key contributor. This person had a direct line to the overall success of the business and therefore the funds can be used to:
- Increase the recruitment of competitive and high-performing candidates to fill the vacant position
- Offset lost sales, productivity and operational interruption costs
- Help in funding rebranding efforts if the person had a consumer facing role
- Provide money to the family of the deceased.
What does key person insurance not cover?
These policies will not cover contractors or the self-employed and payments will only be made upon the death of the person and will not provide funds in the event of retirement or termination.
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How is a key person?
A key person is an employee who is considered irreplaceable. In some cases, he may be the owner of a business, especially if the business or brand is named after that person. Policies can also be taken out for C-suite individuals or niche product developers. Those in highly specialized roles or those who are superior in their field and generate income in exceptional abilities may also be considered key people.
What is the cost of life and key person insurance?
While any cost of an insurance plan will take certain factors into account, insurance companies generally base group life premiums on the overall risk of the business or group. Term life insurance is usually less expensive than permanent or whole insurance. In general, a good rule of thumb is that the higher the death benefit, the higher the cost of the policy.
As for determining the cost of key person insurance, the cost will also differ based on the basis, but to get an idea of the expense, you can add the person’s salary to your direct financial contribution to your company’s bottom line per year, then multiply the result by five. Insurance companies will also consider additional factors such as: the time and effort required to find and recruit a replacement, the cost of hiring, operational interruption costs, lost productivity and lost sales.
Should your business get Key Man insurance vs life insurance?
Aside from being assured that your business will not incur large financial losses along with the loss of human life, another reason you may be interested in key person insurance could be because you are applying for a business loan or other financing. In these cases, a lender or investor may require a key person policy as collateral.
But ultimately, when deciding between the two types of insurance, you may end up with both. As noted above, key person insurance doesn’t cover all employees, so even if you have one person in mind, it won’t cover all of your staff. Group life insurance is a type of personal life insurance that employers can offer to all of their workers at lower rates and can be available to the entire company.
To find the right policies for your business, see the Ebroker policies digital insurance platform.
