What Is Key Person Insurance?

Rebecca Parson
Rebecca Parson

Rebecca Parson

Author

Rebecca Parson is a financial and tech writer with 10 years of experience writing about topics such as life insurance, commodities investing, and the SaaS industry. She has a master’s degree from Johns Hopkins University and a bachelor’s degree from the University of Mary Washington. Her writing has appeared at money.com, sacbee.com, cart.com, herodevs.com, blanchardgold.com, and more.

Brian OConnel
Brian OConnel

Brian O'Connel

Contributor

Brian O’Connell has been a contributing writer for U.S News & World Report since 2016. A former Wall Street bond trader and the author of two best-selling books; “The 401k Millionaire” and “CNBC’s Creating Wealth”, he has 20 years experience covering business news and trends, particularly in the business and financial sectors. He believes education is the best gift a financial consumer can receive – and brings that philosophy to every story he writes. His byline has appeared in dozens of top-tier national business publications, including CBS News, Bloomberg, Time, MSN Money, The Wall Street Journal, CNBC, TheStreet.com, Yahoo Finance, CBS Marketwatch, and many more.

By Rebecca Parson, Brian O'Connel
Author, Contributor, Life Insurance

Main Takeaways

  • Key person insurance is a type of life insurance a business buys to cover a key person at the company in case of the person’s death or disability. 
  • The company pays the policy premiums and is the beneficiary.
  • A company can sell a key man life insurance policy if it doesn’t need it anymore.

What Is Key Person Insurance?

Key person insurance is life insurance a business buys to cover an owner, executive, or other key person in the company. The beneficiary of the policy is the company paying for the policy. This type of policy is also called key man insurance, keyman insurance, key woman insurance, and business life insurance.

A key man insurance policy helps the business keep operating smoothly even if a key person, such as an owner, founder, or top executive, can no longer contribute due to death or disability.

Why Get Key Person Insurance?

Losing a key person can greatly impact a company, especially if they have specialized skills or knowledge that the company cannot easily replace, risking the potential collapse of the business. A keyman life policy mitigates these risks by providing a payout to the company in case of the key person’s death or disability.

In addition to protecting a company from financial losses, key man life insurance provides peace of mind to business owners and shareholders. Knowing that the company is covered in unforeseen circumstances can alleviate some of the stress of running a business.

Some of the categories of loss key employee insurance covers are:

  • Shareholders’ or Partners’ Stakes: This usually lets surviving shareholders or partners buy the deceased party’s financial interests.
  • Profits: For example, compensation for lost revenue due to reduced sales, project delays, or cancellations linked to a key individual.
  • Outstanding Debts: If the key person guaranteed any loans, this provides capital for the business to keep running.

Cost of a Keyman Life Policy

The amount of insurance a company requires depends on its size, nature, and the key individual’s role. We recommend getting quotes for $100,000, $250,000, $500,000, $750,000, and $1 million policies to compare costs.

The expense will also vary based on whether the company opts for a term life insurance policy or whole life insurance. Term life insurance is much cheaper.

Other factors that will influence cost include the key person’s health, gender, and age; the coverage amount; the company’s type and structure; and the industry it operates in.

How Much Key Man Insurance Do You Need?

A good rule of thumb for how much key person insurance you need is 8-10 times the key person’s salary. Alternatively, you can calculate 8-10 times the revenue/profit linked to the key person, including lost revenue, recruitment, and training costs.

You must decide between a term or permanent insurance policy based on what best suits your business needs. 

With a term policy, the business gets a death benefit if the key employee dies while the policy is active. Premiums stay the same for a set period, typically 10, 20, or 30 years. A permanent insurance policy also pays a death benefit if the key person dies while the policy is active, but it includes a cash value fund the business can use.

How Key Man Insurance Works

To get key person coverage, a company buys the policy for specific employees(s), pays the premiums, and receives the death benefit in the case of the employee(s) death. The business can use the death benefit for expenses related to recruiting, hiring, and training a new person. If the business can’t continue, the money can help close debts, give employees severance, and pay investors, among other expenses.

What Are Some Distinct Characteristics of a Key Man Policy?

Some distinct characteristics of a key man policy include:

  • Flexible Coverage: A company can tailor a keyman policy to fit its specific needs and risks. This allows for customized coverage that addresses the unique role and impact of the key person.
  • Premium Flexibility: The premiums can be structured in various ways, such as level or increasing over time, which allows for flexibility in budgeting and managing cash flow.
  • Rapid Payout: In the event of a claim, a key person policy typically pays out quickly to the company, which can provide much-needed financial assistance during a difficult time.
  • Tax Benefits: The premiums paid for key employee insurance coverage are usually tax-deductible as business expenses.
  • No Cash Value: Unlike most other types of life insurance policies, key person insurance typically does not accumulate cash value over time. This means that there is no payout if the key person’s death or disability occurs after the policy has ended.

Can You Sell a Key Person Policy as a Life Settlement?

Yes, you can sell a key person policy as a life settlement, letting the company recoup all or a portion of the premiums paid. Sometimes, the company can sell the policy for significantly more than the premiums expended.

However, selling a key man policy as a life settlement may require all parties’ approval, including the key person and any beneficiaries listed on the policy. It’s also crucial to consider any potential tax implications before making this decision.

FAQs About Key Person Life Insurance

Who Pays for Key Person Life Insurance?

The company that buys a key person life insurance policy pays for it to protect their losses in case a key person in the company dies. The key person doesn’t pay for the policy.

Can a Company Sell Its Key Man Life Insurance Policy?

Yes, a company can sell its key man life insurance policy in a life settlement, or transfer the policy to the employee.

Is Key Person Insurance Tax-Deductible?

Yes, key person insurance is usually tax-deductible for the company that holds the policy.

In Conclusion

Key person life insurance can be helpful for companies whose continued operations rely heavily a key individual. If your company has bought such a policy and doesn’t need it anymore, you can sell it in a life settlement. Contact us today to discuss your options.

Sell your life insurance policy for cash.

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We’re here to help. Speak with a Policy Specialist today at +1 848-456-8333