key man insurance powerpoint presentation

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What Is Key Person Insurance?

• How It Works
• Categories of Loss Covered
• Key Person Insurance FAQs

The Bottom Line

• Business Insurance
• Small Business Insurance

Key Person Insurance: Definition, Cost, Types, and How It Works

Julia Kagan is a financial/consumer journalist and former senior editor, personal finance, of Investopedia.

Katrina Ávila Munichiello is an experienced editor, writer, fact-checker, and proofreader with more than fourteen years of experience working with print and online publications.

Investopedia / Zoe Hansen

Key person insurance is a life insurance policy that a company purchases on the life of an owner, a top executive, or another individual considered critical to the business. The company is the beneficiary of the policy and pays the premiums . This type of life insurance is also known as "key man (or "keyman") insurance," "key woman insurance," and "business life insurance."

Key Takeaways

• Key person insurance is a life insurance policy a company buys on the life of a top executive or another critical individual.
• Such insurance is needed if that person's death would be devastating to the future of the company.
• For small businesses, the key person might be the owner or founder.
• The company pays the insurance premiums and is the policy's beneficiary, should the person die.

Understanding Key Person Insurance

Key person insurance offers a financial cushion if the sudden loss of a certain individual would profoundly negatively affect the company's operations. The death benefit essentially buys the company time to find a new person or to implement other strategies to save (or shut down) the business.

In a small business, the key person is usually the owner, the founders, or perhaps a key employee or two. The main qualifying point is whether the person's absence would cause major financial harm to the company. If this is the case, key person insurance is definitely worth considering.

In addition to life insurance, key person insurance is also available as disability coverage in case the individual is incapacitated and no longer able to work.

The Process of Key Person Insurance

For key person insurance, a company purchases a life insurance policy on certain employee(s), pays the premiums, and is the beneficiary of the policy. In the event of the person's death, the company receives the policy's death benefit.

That money can be used to cover the costs of recruiting, hiring, and training a replacement for the deceased person. If the company doesn't believe it can continue operations, it can use the money to pay off debts, distribute money to investors, provide severance benefits to employees, and close the business down in an orderly manner. Key person insurance gives the company some options other than immediate bankruptcy .

To determine whether a business needs this kind of coverage, company leaders must consider who is irreplaceable in the short term. In many small businesses, it's the owner who does most things, such as keeping the books, managing employees, handling key customers, etc. Without this person, the business can come to a stop.

Categories of Loss Covered by Key Person Insurance

Key person insurance can cover a company against a range of risks. For example, it may provide:

• Insurance to protect profits—for example, offsetting lost income from lost sales or losses resulting from the delay or cancellation of any business project involving a key person.
• Insurance designed to protect shareholders or partnership interests. Typically, this enables the surviving shareholders or partners to purchase the financial interests of the deceased person.
• 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.

Cost of Key Person Insurance

How much insurance a company needs will depend on the size and nature of the business and the key person's role. It's worth asking for quotes on $100,000, $250,000, $500,000, $750,000, and $1 million policies and comparing the costs of each.

The cost will also depend on whether the company buys a term life policy or a permanent life policy . Term life is almost always significantly cheaper.

In addition, the cost of the coverage will vary on a variety of factors, such as the health of the key person, their gender, their age, the type of policy, the amount of coverage, the type of company, its structure, and the industry it is part of.

What Are the Benefits of Key Person Insurance?

Key person insurance financially protects a company against the death or incapacitation of its key person. The money from the insurance helps a company replace the key person and the costs associated with doing so. It can also be used to pay off debts, pay back investors, or cover any other financial costs the company may incur when losing its key person.

How Much Key Person Insurance Do You Need?

The amount of key person insurance needed for a business will vary depending on the business and the type of role the key person plays. Purchasing key person insurance that is eight to 10 times the key person's salary is often recommended or the monetary value of the key person. The latter option can be difficult to value, but methods include the amount of revenues/profits associated with the key person or the costs required to replace the key person, which includes recruitment, training, and the loss of revenue in the time it takes to replace the individual.

Who Pays for Key Person Insurance?

The company that purchases the key person insurance is the entity that pays the premiums for the insurance. The key person does not pay the insurance.

Key person insurance allows a company to continue to operate in the event of the loss of an individual critical to the success of the business. The death benefit to the company can cover a variety of costs to ensure the business can survive the sudden loss of its key person. Choosing the right key person insurance, the amount of the policy, and other details is particularly important for small businesses and new startups.

• Life Insurance Through Work 1 of 18
• Group Life Insurance: How It Works, Types, Pros & Cons 2 of 18
• Group Carve-Out Plan: Meaning, Benefits, Limitations 3 of 18
• Group and Individual Disability Insurance Overview 4 of 18
• Company-Owned Life Insurance (COLI): Definition, Purpose, Taxes 5 of 18
• Everything You Should Know About Corporate-Owned Life Insurance 6 of 18
• Accidental Death Benefit: What It Is, Examples of What It Covers 7 of 18
• Accidental Death and Dismemberment (AD&D) Insurance 8 of 18
• Voluntary Accidental Death and Dismemberment Insurance (VAD&D) 9 of 18
• Key Person Insurance: Definition, Cost, Types, and How It Works 10 of 18
• What Is Voluntary Life Insurance? Definition, Types, and Example 11 of 18
• How Split-Dollar Life Insurance Works 12 of 18
• keyman insurance 13 of 18
• Is Your Employer-Provided Life Insurance Coverage Enough? 14 of 18
• When Should You Get Supplemental Life Insurance? 15 of 18
• How Much Life Insurance Should You Have? 16 of 18
• 5 Life Insurance Questions You Should Ask 17 of 18
• What Happens to Employee Insurance Benefits When Bankruptcy Occurs? 18 of 18

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Key Person Insurance

Jan 02, 2020

170 likes | 181 Views

Key Person Insurance. What are the 4 things that happen to key people ?. They die They become disabled They quit They stay with a company until they retire Each creates problems for you, the employer of the key people.

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Presentation Transcript

What are the 4things that happen to key people ?....

They die • They become disabled • They quit • They stay with a company until they retire Each creates problems for you, the employer of the key people.

The success or failure of your business depends on key people who are part of management They are the people who..... • Make major business decisions • Produce sales results • control finance • Have production “know-how” • Have creative ideas Every successful business must have one or more of these individuals !

Your business has its future invested in its key people.... • Competition is becoming more intense • Production and sales methods are continually changing • Operations are becoming more complex • Constantly rising costs and taxes mean steadily decreasing margins and profit

The death of a key person creates real financial problems.... • Cost of finding and attracting a suitable replacement • Loss of time, production, profits...until the new individual becomes “qualified” • Credit may be impaired or lost entirely • An important project or transaction may have to be curtailed or canceled • Competitors become more aggressive while customers feel uncertain • Employees worry about job security • Inevitably, the business suffers a serious financial shock. Cash will be urgently needed.

There are 4 methods of supplying cash upon the loss of a key person….

1. From future earnings or surplus cash But if the loss of a key individual means reduced income, then working capital and credit can be jeopardized by future demands on shrinking profits.

2. By borrowing But if credit is weakened it may be difficult to borrow adequate funds. The need is to increaseASSETS not liabilities.

3. By building a special reservefundnow But sufficient cash can be accumulated only if death does not come to soon. The fund would be subject to any limitations on accumulated surplus. It is not economical to tie up funds which could be better used as working capital.

4. By insuring the life of the key person in favor of the company For a cost, usually less than the interest on the money, funds are guaranteed to be available immediately when the need arises.

Cash,guaranteed when needed through key person life insurance, will absorb part of the financial shock, bolster credit, help attract and train a replacement and reassure customers, suppliers and employees

Other Benefits... • Mortality gain is payable out of the Company’s Capital Dividend Account TAX FREE. • Provides an increasing reserve of readily available CASH. • CASHaccumulates on a tax deferred basis. • Provides excellent collateral.

Other Benefits • Can be used to pay death benefits to deceased’s widow(er). • Exempt values can assist in funding of retirement benefits. • Instills confidence and loyalty in the key person.

Profits, for the most part, result from managerial skill applied to physical assets. Insuring your key people insures your greatest source of profits. Without this protection, profits may suffer. Today the choice is yours. Which will it be ?

How does it work ? The Business Purchases and retains all ownership rights to a policy on the life of each key person Premiums Proceeds

Let’s determine what the loss of a key employee could mean to your firm

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KEYMAN INSURANCE - PowerPoint PPT Presentation

KEYMAN INSURANCE

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