The Complete Guide to Key Person Insurance

complete guide to key person insurance

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Picture of Jake Tamarkin, MBA

Jake Tamarkin, MBA

Jake is a nationally-licensed insurance agent with a Masters in Business Administration and CEO of Everyday Life. His expertise has been featured in: Investopedia, Life Insurers Council, Insurance Thought Leadership, Life-Annuity Agent, and Insurtech Insights.

You’re always going to have key players in any given business. Whether it’s the CEO or a seasoned sales executive, these people play a vital role in the health of the company. Key Person Insurance is designed to protect against the potential consequences of that person’s death or disability. While this sounds like something large companies would invest in, it’s a common purchase for small businesses, as SBA loans typically require some form of key person insurance.

Let’s break down what key person insurance covers, when it’s important, and some key factors to keep in mind.

What is Key Person Insurance?

Often referred to as “Key Man Insurance,” key person insurance is a form of life and disability insurance that protects a business from the financial loss they might incur from the death or illness of an employee.

Key person insurance is typically purchased by the business to cover C-suite employees, founders, or individuals with specialized skillsets. Anyone who is identified as critical to company operations could be insured.

Why Purchase Key Person Insurance?

Getting an SBA Loan or Other Business Loan

Having key person insurance in place can enhance a company’s creditworthiness in the eyes of lenders and investors. It demonstrates a proactive approach to risk management and assures the lenders that your company could continue healthily in the event of your absence.

Minimizing Risks

Key person insurance helps mitigate the financial risks associated with the loss of a key individual. The payout could help to cover expenses like recruiting and training replacements, compensating for lost revenue, or paying off debts and obligations.

Factors to Consider

Determine Your Key Person

The first step when purchasing a plan is figuring out who to cover. Determine your key players, and assess what the business might look like in the event of their passing. Key person insurance is often purchased for the CEO or founder, but that’s not always the case. If you have a team member with a very niche skillset that could take months to adequately replace, you might consider insuring that individual.

Coverage Amount

Calculating the amount of coverage you need is possibly the most important part. Think about their contribution to the business, their salary, and potential training/replacement costs.

Policy Type & Duration

When structuring your policy, you’ll need to choose a policy duration, coverage type (life insurance, disability insurance, critical illness insurance), beneficiary designation, and premium payment terms. How do you know which coverage type suits your needs?

Below we break down what each form of insurance covers. You’ll definitely want life insurance, the others are often available as an add-on.

Types of Key Person Insurance

  1. Life Insurance: Provides a death benefit to the business in the event of the key person’s demise.
  2. Disability Insurance: Offers coverage if the key person becomes disabled and is unable to work.
  3. Critical Illness Insurance: Provides a lump sum payment if the key person is diagnosed with a specified critical illness.
  4. Key Employee Replacement Insurance: Covers the costs of recruiting, hiring, and training a replacement for the key person.
  5. Business Overhead Expense Insurance: Reimburses the business for certain fixed expenses during the key person’s absence.
  6. Shareholder or Partnership Protection Insurance: Provides funds to buy out the deceased or disabled key person’s shares or ownership interest.

Try Our Online Life Insurance Calculator

Buying key person insurance (like buying any form of life insurance) can seem unnecessarily complicated. At Everyday Life, our goal is to make the process as easy as possible, while keeping you informed on what you’re buying. That’s why our online life insurance calculator guides you through the analysis of your financial needs. It’s designed to provide you with the expertise of an insurance advisor in a complete digital experience, available 24/7. Give it a try and find the right policy for you.Still have questions? Give our team a call.

Disclaimer: The comments, opinions, and analyses expressed at Everyday Life are for informational purposes only and should not be considered individual investment, legal or tax advice.

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