Insurance for key personnel

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Keyman insurance, often called key man or key person insurance, can assist firms protect themselves financially if a key employee dies or becomes permanently handicapped. That's significant because 71 percent of small enterprises have only one or two individuals in charge of day-to-day operations. When executing a buy-and-sell agreement to transfer control of a business if one partner dies, keyman insurance may be required.

TAKEAWAYS IMPORTANT

• Keyman insurance, also known as key person insurance, is designed to protect vital personnel who contribute significantly to a company's earnings.
• The business, rather than an individual, is usually the beneficiary of a keyman insurance policy.
• Term life and permanent life insurance policies are available, depending on the needs of the company. It could also be in the form of disability coverage.

What is Keyman Insurance, and how does it work?

Keyman insurance is a sort of policy designed specifically for small enterprises. These plans are intended to recompense the company if a key employee dies or gets handicapped and is no longer able to perform their duties.

A key person is someone whose talents and/or knowledge make a significant contribution to the company's income and profitability. This could include:

• Owners or partners in a business
• Members of the senior management team
• Top-performing salesmen
• In essence, keyman insurance is a risk management tool. The policy could give funding to maintain day-to-day operations, clear outstanding debts, and/or find a suitable replacement if a key person dies or becomes disabled.

The firm is usually the principal beneficiary of a keyman insurance coverage and is responsible for paying the premiums.

What Kind of Keyman Insurance Do You Need?

There is no exact method for calculating how much keyman insurance is required. A lot of factors can influence the final figure, including:

• The number of employees and the size of the company
• How much revenue or income the insured person brings in for the company
• How much debt does the company have?
• How much would it cost to acquire and train someone to replace a critical employee?
• Whether the company will continue to operate if a key employee dies.

For example, if you own a family business that was started by your parents, you may want to acquire a larger policy to ensure that the business can continue if one or both of them pass away. If you run a sole proprietorship with no employees, on the other hand, you may only want enough coverage for yourself to pay off any outstanding debts owing by the company.

Small-business loans and keyman insurance

The fundamental purpose of keyman insurance is to protect key individuals inside a company. It can, however, be used for other purposes, such as serving as security for a Small Business Administration loan. The Small Business Administration (SBA) does not make loans directly, but it does guarantee them to licensed lenders.

As a result, when insuring loans to small business owners, the SBA has a variety of insurance criteria that must be completed. If you want to get an SBA 7(a) loan, for example, you might need to get a keyman life insurance policy because the loan isn't entirely secured by other types of collateral. When the business is operated as a sole proprietorship, a single-member LLC, or otherwise relies on one owner's active participation, this criterion applies to 7(a) loans of $350,000 or more.

Buy-and-Sell Agreements with Keyman Insurance

Buy and sell (or buy-sell) agreements define how a business's ownership interest can be transferred from one person to another. As an example, suppose you own a firm with a long-time buddy and want to retire before they do. You might write a buy-sell agreement that spells out what will happen to your portion of the company when you're ready to leave.

Within a buy-and-sell agreement, a keyman insurance policy can be utilized to ensure that each co-owner is insured if something happens to the other. If you die, the money of a keyman insurance, for example, could be used by your co-owner to buy out your portion of the business. This will enable the firm to continue after you have passed away.

Keyman Insurance's Limitations

While this insurance can cover a wide range of events, it isn't appropriate in some cases. Keyman insurance, for example, does not cover:

• A important employee leaving your organization to work for a rival
• Independent contractors and non-employees
• Employees who aren't important to the company's income or operations

In order for keyman insurance to be essential and helpful, it must also have an insurable interest. You might not be able to purchase a coverage if the loss of a certain employee would not create financial harm to the company.

How to Obtain Keyman Coverage

If you're thinking about getting a keyman insurance policy for your company, you'll need to ask a few key questions first, such as:

• Is it necessary for the insurance to cover death, disability, or both?
• In your situation, how much keyman coverage is required and appropriate?
• Is this policy going to be included in a buy-sell agreement?
• What will be done with the money if the key person who is covered dies?
• Has the employee given their consent, or are they likely to do so, if you're insuring them?
• Is it better to buy term life insurance or permanent life insurance?

Keyman life insurance and keyman disability insurance are available from a variety of companies. Consider the types of coverage they provide (e.g., term life, permanent life, disability), the available coverage amounts, and the projected premiums you'll pay when comparing firms. It's also a good idea to speak with an insurance agent who specializes in these types of products.

Final Thoughts

A keyman insurance coverage might assist in providing financial security for your company. Before you buy an insurance, make sure you read it thoroughly to understand what is and isn't covered. Also, keep in mind that if your company's employees changes, you may need to update your insurance coverage.