Key Man insurance is a life insurance policy taken out on an invaluable company executive or employee. Also known as key person insurance or business life insurance, the purpose of the policy is to help the company offset some of the financial losses brought about by an untimely death of a ‘key’ employee.
Related: A guide to all types of business insurance
Why Key Man insurance?
Nobody starts a business thinking about dying. Nonetheless, for many companies staying afloat depends disproportionately on the physical well-being of a single individual.
In the case of startups and small businesses, most of that burden typically lies on the founder himself. However, the person in question can just as well be a particularly talented sales rep or any employee objectively crucial for the company’s goals and business objectives.
In today’s highly specialised market, individual talents are often the main source of business success. Should anything happen to the firm’s breadwinner, the entire venture would likely suffer significant losses. Not only is the company bound to lose revenue, but the costs of hiring and training a successor can also be overwhelming in itself.
That’s where Key Man insurance comes in, helping businesses overcome the costs associated with loosing a major contributor to their bottom line. The company can use the insurance money to find a suitable replacement, settle debts, repay the investors and more.
How to choose a policy
If there’s an employee that seems irreplaceable (or very hard to replace) at least in the short term, getting him or her insured can help effectively protect your business assets. But how much insurance does your business need?
When deciding on the Key Man insurance policy try quantifying the losses that would incur in case of an employee’s death. How much money would you lose? How much would you have to spend re-hiring? How much does your company need to weather the storm and get back on its feet?
To get the best value for your money, be sure to compare the quotes and ask for term insurance, i.e. policies that provides coverage only for a specified time frame. Unlike personal life insurance, purchasing a life settlements policy in this particular case can often be an unnecessary expense.
The potential drawbacks of Key Man
Despite its obvious benefits, the popularity of Key Man insurance has dwindled over the last decade. When it was first introduced, it was not that uncommon for top talent and high-level executives to stay with the same company throughout their entire career. Times have changed however and with it, the viability of Key Man insurance as a risk-management tool.
If an insured employee decides to leave the company, there are a few things you can do with his Key Man policy. Sometimes, it’s easiest to just surrender the policy and embrace the loss on the already-paid premium. However, some policies do feature surrender charges, making it unwise to cancel the premium payments until the specific term has passed.
If you’re looking for an alternative, some countries recently started letting businesses sell their Key Man policies to a third party for a fraction of its full value. The buyer will keep paying the premium, hoping to collect the benefits in the event of the insurer’s death.
As these so-call ‘life settlements’ are still fairly new, legislation tends to vary significantly from country to country. Make sure to consult your local regulations before offering to sell your Key Man insurance to any third party.
Related: A list of UK business insurers and their options
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