What is the meaning of key man insurance?
Key man insurance, also known as key person insurance, is a type of life insurance policy that a business takes out on the life of a key employee or leader within the company. The purpose of key man insurance is to provide financial protection to the business in the event that the insured key person passes away or becomes disabled. Here’s a breakdown of its meaning and purpose:
Key Person: The “key person” in key man insurance is an individual within the company who is considered essential to the business’s success. This person is typically an owner, founder, executive, or an employee with specialized skills, knowledge, or a unique role that is crucial to the company’s operations and financial stability.
Insurance Policy: The business purchases a life insurance policy on the key person’s life. The company pays the premiums for this policy.
Ownership and Beneficiary: The business is both the owner and beneficiary of the policy. This means that the company pays the premiums and, in the event of the key person’s death or disability, receives the insurance payout.
Purpose: The primary purpose of key man insurance is to protect the business from the financial impact of losing a key employee. In the event of the key person’s death, the insurance payout can be used by the business for various purposes, such as covering the costs of finding and training a replacement, paying off debts, or maintaining financial stability during a challenging transition period.
Premiums: The cost of key man insurance, in the form of premiums, depends on factors like the key person’s age, health, coverage amount, and the policy’s term length. The business is responsible for paying these premiums to keep the policy in force.
Tax Considerations: In many jurisdictions, the premium payments for key man insurance are not tax-deductible expenses, and the death benefit may be subject to taxation. It’s essential to consult with a tax advisor to understand the tax implications in your specific location. You can read more on key man insurance taxation here.
In summary, key man insurance is a financial safeguard that businesses put in place to mitigate the risks associated with the loss of a key employee or leader. It helps ensure the company’s continuity and provides funds to navigate the challenges that may arise due to the key person’s absence.