What is Key Man Insurance, and Why Do Companies Need It?


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What is key person insurance, and why should your company pay out for it? Also called key man insurance, this policy is a form of life insurance taken out by a company to cover the life of the business owner, a senior manager, or any other individual who’s critical to the running and/ or survival of the company. The cost of the premiums comes out of the company’s bank account, and the company is the beneficiary if the individual covered should die while it’s in place. There are lots of advantages to companies of having key man insurance in place, and in this article, we’ll explore some of them.

Many companies, especially those on the smaller side, would be in serious trouble if a key employee died suddenly. If the business’s day-to-day operations would suffer because that person wasn’t there to do their job anymore, then key person insurance is there to provide a financial cushion. The sum of money received from the policy effectively buys the time the company might need to find a replacement or to put in place other strategies that would save the company. In some circumstances, the pay-out might provide the finance needed to shut the business down in an orderly fashion and meet all its financial responsibilities in the process.

What constitutes a ‘key person’, and is this type of insurance necessary?

The so-called key person in a small business is typically the owner, the founder, or one or two employees who the company relies on to operate successfully. The main criteria when deciding if your company needs this type of insurance is whether that person’s absence would result in significant financial loss to the company and/ or whether they would be irreplaceable in the short to medium term. If this is the case, then key person insurance is definitely something worth thinking about.

In many small businesses, it’s the owner who’s responsible for many of the tasks associated with the smooth running of the day-to-day operations. Their duties might include bookkeeping, employee management, or dealing with key customers, say. But other individuals might be irreplaceable in your company. For some businesses, it could be the in-house IT expert; a knowledgeable, experienced craftsman; your top salesperson; or the individual who makes most of the strategic decisions, for instance.

If the named key person dies and the policy pays out, what can the money be used for?

Some examples include covering the costs of finding, hiring, and training a replacement for the deceased employee. If, on the other hand, the company’s management believes that it won’t ever be able to continue operations without the key person, the pay-out can be used to pay off any corporate debts, distribute money to investors, provide severance benefits to employees, and wind up the business in a timely, orderly manner. In short, the pay-out from a key man insurance policy offers the company a range of options other than immediately being plunged into bankruptcy.

What do these types of policy cost?

Policies can cover insurance on the individual’s life; provide cover in case of critical illness, or both. They’re generally taken out for a specific length of time and can usually be cancelled at any time without incurring any form of penalty, though, in this event, your premiums won’t be returned.

The cost of any such policy depends on factors such as the age and general health of the person insured, as well as the amount payable on their death or on being diagnosed with a critical illness.

What are keyman insurance benefits?

Key man insurance is something that every company should consider, although very often, it’s businesses at the smaller end of the scale who need it most. Surprisingly, though, these are the very type of businesses that overlook its advantages.

The main advantage is that it offers peace of mind. If anything happens to the individual who’s essential to the smooth running of the business, key man insurance can help secure employees’ jobs and the future of the company itself.

It can also help maintain the value of the company’s shares if the key person is no longer able to work. While the price of the company’s shares may fall in the short term, investors can be reassured that any financial losses will be covered by the proceeds of the insurance policy. That means they may not feel any urgency to sell their shares right away, thus buying the company time while it gets back on its feet again.

And if a company is set to merge with another or is about to be sold, for instance, prospective buyers and investors are more likely to place a higher value on it if they know it has insurance to cover the cost of replacing a key employee.

One other benefit of this insurance is that it demonstrates to the key person that they are valuable to the business. This can boost their morale and help ensure their future loyalty to the company.

The Qualifications of an Insurance Provider

Every business is unique, so if you’ve decided to take out key man insurance, you need a reliable insurance provider to make sure you are buying the right kind of policy. You should look for an insurer that specialises in this type of policy; has a good track record in the business; and can point to a host of positive reviews from past and existing clients.

Make sure you research the key man insurance company market before opting for any particular provider. Reviews from past and existing clients will be available on independent review sites. You could ask colleagues in your network for recommendations. And of course, you should speak to providers yourself to evaluate their knowledge of the products available.

Any good insurer will take steps to get to know your business and how it operates so they can recommend a policy that can be most effectively tailored to your company’s unique requirements.

An Insurance Company You Can Rely On

If this article has given you food for thought and you’d like to consider key person insurance for your business, talk to us.

My Key Finance are experts in all kinds of business insurance, including key man insurance, relevant life cover, business loan protection, and shareholder protection. All the products we offer come with a best price guarantee. We also offer beneficial rates on a variety of other commercial insurance products, making us a one-stop shop for all your business insurance requirements.

Please feel free to call us to discuss key person insurance for your business or visit our homepage, for an instant quote.

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