Managing a small business is often a challenge, as it requires numerous partners and employees to ensure everything runs smoothly. The death or disability of a business owner can devastate a company and make it nearly impossible to succeed. One way to prepare for this situation is to invest in key man insurance to help your company overcome such a difficult and uncertain situation.
What is Key Man Insurance?
Key man or key person insurance can help your business survive the passing or the disability of the owner or a key employee. Purchasing a key man insurance policy makes it possible for the company to be the owner and beneficiary of the policy, while the insured is the owner that’s key to the management of the business. Getting this life insurance is especially valuable if the growth or revenue of a company is highly dependent on one person or only a few people.
What Does Key Insurance Cover?
A key insurance policy makes it possible for a business to continue to operate without shutting down or filing for bankruptcy if the owner dies or suffers a disability. This insurance can also cover a core employee, as it can help pay for operating expenses until you find another replacement, and it will also go towards the cost of training the replacement. In addition, key man insurance helps to offset any lost income, which is especially important during this transition period for a business.
Other Options for Key Man Insurance
Key man insurance also gives you the flexibility to use these proceeds to cover any debts, pay severance to workers, and distribute money to investors if you decide to close down the business. These insurance proceeds are also tax-free if you get the permission of the key person before buying the policy while filing Form 8925 with the IRS. Reaching out to an insurance agency is helping in learning more about the details of the policy.
Here is an overview of the different types of key man insurance policies available.
Term Life Key Man Insurance
Term life insurance is always the most affordable and popular choice for key man insurance. You simply pay premiums each month or every year, and you are covered if the insured dies during the term of the policy. Usually, you can purchase a term life key man insurance policy for up to 35 years and renew it once the policy expires.
Whole Life Key Man Insurance
Whole life insurance is another option, as it doesn’t expire, and it will remain in effect if you pay the premiums. However, whole life insurance is more expensive, but the premiums will go towards a savings account. Over time, the policy gains cash value, and you can withdraw or borrow money against it.
Variable Life Key Man Insurance
Variable life insurance is fairly similar in structure to whole life insurance, as it stays in effect while you are paying your premiums. The biggest difference between whole life and variable life insurance is that the premiums are placed in investment accounts, which can gain or lose value based on the stock market.
Disability Key Man Insurance
Disability key man insurance is an option that allows the insurer to pay a benefit if the insured suffers a disability that prevents them from working. Usually, this type of insurance is short-term, as it can provide benefits anywhere between six to 24 months. Buying this insurance is helpful in keeping a business operating while the key person is recovering from a short-term disability.
What are the Limitations of Key Man Insurance?
Understanding the different limitations of key man insurance is important before you purchase this insurance policy. For example, the first two to three years of the policy is known as the “contestability period,” as the insurer can deny claims due to suicide or investigate a claim more closely for fraud. The coverage for key man insurance is also limited to five to ten times the gross compensation for the insured person.
How Much Does Key Man Insurance Cost?
The price of key man insurance is dependent on a variety of factors, such as age, health, and the lifestyle of the insured. Other factors include the insured’s occupation, total compensation, and the amount of coverage needed to meet the needs of your business. If the insured leaves the company, you can either cancel the policy or transfer the policy to the insured, as they will need to make a few changes before they begin paying the premiums.
How Much Coverage is Recommended?
Trying to determine the monetary value of an owner or a key employee of a business is often difficult. It’s often recommended for small businesses to buy as much key man coverage available while staying within budget. You can also use several different formulas to calculate the amount of coverage needed.
The cost to replace formula simply adds up the expense of finding, hiring, and training a replacement for the insured. Another formula is the contribution to earnings, as you can figure out this number by multiplying the profit that the insured brings to the company by the number of years it will take for your company to replace these earnings. You can also multiply the key person’s compensation by the number of years it will take for you to recover from the loss.
Contact Flagler Financial to Learn More About Key Man Life Insurance
Flagler Financial is one of the leading boutique insurance agencies working with businesses in the United States. Delivering top-quality services while meeting the unique needs of our clients is our top priority, as our home office is in Palm Coast, FL.
Our company offers a wide range of services, whether you need life insurance, estate protection, buy-sell agreement funding, payroll administration, business valuations, human capital management, or workers comp.
We work with businesses of all sizes, and our team is always happy to answer any of your questions.
Feel free to contact Flagler Financial today to learn more about key man life insurance!
