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Do I Need Key Person Life Insurance?

Have you ever thought about what would happen if your key employees were to leave your organization suddenly? How about if you couldn’t get access to their intellectual property and business intelligence? Key person life insurance can help your business stay protected in events like these, equipping your business financially in case of sudden death.

What is Key Person Life Insurance?

Often, you’ll hear Key Person life insurance called Key Man Insurance or Business Life Insurance. Whatever the title, the concept is the same. This type of coverage is a life insurance policy for specific employees.

The purpose behind this insurance is clear — if a key person in your organization were to pass away, the business intelligence and insight would pass along with them. Therefore, the company will purchase a life policy on the life of an owner, top executive, or another individual considered critical to the company.

How Does Key Person Life Insurance Work?

When a company purchases a key person life insurance policy for one of their employees, the company not only pays the premium on that insurance policy but is also the beneficiary if the insured person passes away. In other words, if the employee were to pass away, the company would receive the death benefit up to a specific limit. That money is used to either replace the employee’s revenue or cover costs associated with replacing the employee.

It’s important to note that employees should not worry about a secret life insurance policy in their name that their employer has taken out. Although the company is the beneficiary, the insured employee must agree to a policy in their name.

If the policy remains once the employee retires, companies will often gift the policy upon retirement. This decision is not required when purchasing the policy. It is up to the company whether they will gift that policy as a retirement gift or simply cancel it.

What Type of Key Person Life Insurance do You Need?

Businesses have options when it comes to choosing life insurance for key employees. They can decide between term or permanent life policies.

Term insurance provides coverage for specific periods or terms. These periods can be either 10 to 30 years. If the employee passes away during their term, the business will receive the death benefit until the term ends.

Permanent insurance offers lifetime coverage in two parts. The first part is the death benefit paid out to the business after the employee passes away. The second part is a cash benefit, which is a forced savings that can be made available to the employee while they are still alive.

If you plan to gift the policy to your employee after retirement, having the permanent insurance coverage type makes the most sense. This type of policy can also be an incentive when negotiating contracts for these critical employees.

Do I Need Key Person Life Insurance?

There’s no requirement to get key person life insurance for your business. It’s truly a decision that you’ll need to make when looking at your organizational structure. That decision often boils down to two questions:

  1. Do you have any members of your team that are critical to the operation of your business?
  2. How much would it cost to replace the employee’s set of skills or knowledge?

Often, these questions result in a business wanting to insure the owner. That part is clear, but other positions deem consideration too. The C-Suite of an organization often holds a lot of business intelligence and responsibility when it comes to making critical decisions that will impact its trajectory. Likewise, top-producing salespeople or any employee holding intellectual property might also be worthwhile to insure.

Only you can determine how much it will cost to keep the business operating and profitable if any key employees suddenly pass away or leave. If you have one or two stand-out leaders who are innovative and have the skill sets required to keep your business running continuously, you may want to purchase this coverage.

How Much Key Life Insurance Do You Need?

The amount of key life insurance you’ll need boils down to how much your business will need if the key person passes away. The higher the limits you choose for your employees, the higher your insurance premiums. Therefore, it makes sense for you to take out a policy that will cover the loss you’ll face, but nothing above and beyond that loss.