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What is a Key Man Insurance Policy?

what is a key man insurance policy
Written by Sonny

As employees of companies both big and small, we know that there are certain people within our companies that without them, our organization wouldn’t be the same or continue to function at all.  This may be the CEO, an accountant, the small business owner, recruiting manager, or that top salesperson.  All of these individuals are vitally important to the functioning of the company.

Now, what would happen if the work performance of one of these key people is affected by injury, disability, or even death?  Would the company collapse or would there be a successful transition that allowed the employees to remain working?  Securing key person life insurance also referred to as key man insurance, could save your company in the event that a key person or people were unexpectedly unable to work.

Key man or key person insurance is critical to the business continuation of small companies that typically thrive on the revenue produced by a handful of individuals. Typical examples are:

  • A small law firm
  • Real estate brokerage
  • Insurance agency
  • Accounting firm
  • Hair Salon
  • Any artisan contractor

It’s very likely that most small businesses would suffer significant financial losses if any of their rainmakers were to die unexpectedly or become disabled. Some could weather the storm, but many could fail.

What Does Key Man Insurance Protect?

Whether your business is big or small, key people keep things functioning efficiently and smoothly.  Your company needs to be protected in the event of their loss.  Key man insurance provides coverage for a specific person within the company, such as the owner or CEO.  For smaller businesses, the key person is usually the owner.  The key people in any business or industry are those considered vital to the functioning of said company.

Your company needs to insure its key person(s) in case that person(s) suddenly dies, is incapacitated, or is unable to perform their job.  A key man insurance policy may be:

Key man insurance policies provide coverage for premature death, sudden departure, or disability of a key person within an organization.  The coverage also provides for financial support during any required recovery time or in the event that the key person can no longer work at their original capacity.  The term for the policy is usually specified, or is until the key person being insured is no longer affiliated with the company or is no longer considered a key person.

The business itself is the named beneficiary of the key man insurance policy.  The business selects the insurance policy needed, applies it to the key individual of the company, pays the premiums, and collects the payout if the key individual dies.

Actually, most insurance carriers do not offer a policy explicitly called a “key man policy”, rather it is usually written in the form of a standard life insurance policy.


Why Your Company Needs Key Person Life Insurance

Anyone in the corporate world knows that the loss of an important member or leader in the business can have extreme financial consequences.  Without these key leaders or a business owner, the company is at risk of dissolving or suffering significant detriment to its success.

A key man life insurance policy ensures that your company will be secured financially in the event of a key person’s death.  The policy equips you with the ability to provide for such things as hiring, training, or paying sign-on bonuses.  You are also afforded the ability to recover from the loss of profits or to handle any debts incurred during company recovery time.

In the event of a claim, the policy amount is typically paid directly to the business so that it can be used to cover any financial losses suffered due to the key person’s death. If a business closes its doors due to the loss of a key person, the key man life insurance policy in place can be used to handle closing costs, employee severance pay, and investor payouts.


What Type of Coverage is Best for Key Man Insurance?

It’s imperative to obtain both key man life insurance and disability insurance.  An individual is more likely to suffer from a disability than from an untimely death, making disability insurance a must.

Furthermore, each life insurance product has its own unique benefits and features.  Some products include life insurance riders, such as the chronic illness, terminal illness, critical illness, and disability income insurance riders, which provide additional coverage.

Should you chose a stand-alone key man disability income insurance policy, you will want to learn about the beneficial riders that can be added as well.  It is a wise investment to protect your business from the disastrous loss of a key person, either due to disability or death.


About the author


After spending 25 years in the insurance industry, I reinvented myself into a freelance writer and web designer for the insurance industry. Now I get to talk about insurance instead of having to sell it. I currently write for all types of insurance agents, brokers, and companies.

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