Breaking Down Key Man Insurance, It's Pro's and Con's
Key Man Insurance, or key employee insurance is coverage that will protect a company from an untimely death or disability of a top salesperson, executive or business owner. Key person insurance provides peace of mind to business owners and shareholders alike knowing that the business can continue operations without major disruption in the event of the loss of a key or very important employee. If death or disability shows it's scary face in your business, Key Man Insurance may be the difference between the company’s death and its ultimate success.
Many people and insurance agents themselves make the mistake of thinking key man insurance is a simple life insurance policy. Yes, life insurance is one of necessary elements of a good key man insurance plan, but in many cases key man disability insurance is just as important. The risk of a death is always present, with most ages the risk of disability is much higher. So to get adequate protection, most companies should secure both key man life and key man disability on their important employees and executives.
There are four main categories of loss which key person insurance can provide compensation:
1. Losses related to the extended period when a key person is unable to work, to provide temporary personnel and, if necessary to finance the recruitment and training of a replacement.
2. Insurance to protect profits. For example, offsetting lost income from lost sales, losses resulting from the delay or cancellation of any business project that the key person was involved in, loss of opportunity to expand, loss of specialized skills or knowledge.
3. Insurance to protect shareholders or partnership interests. Typically this is insurance to enable shareholdings or partnership interests to be purchased by existing shareholders or partners.
4. Insurance for anyone involved in guaranteeing business loans or banking facilities. The value of insurance coverage is arranged to equal the value of the guarantee.
Premiums for Key person Insurance are normally based on such factors as the amount of coverage, age, physical condition, and overall health history of the covered individual. Costs can be fairly low in case the key person is young and in good shape.
The tax treatment for premiums paid for key person insurance and the treatment of monies received from a claim vary among countries. Premiums are generally not tax deductible in the U.S
Keyman Insurance may be just as crucial to "niche" category businesses: research firms, companies with special contracts and businesses with proprietary systems and patents. Their key employees are crucial for the success of their businesses, as they have unique niche expertise, which is hard to replace.
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