There’s a good reason why Apple kept a tight lid on Steve Jobs’ recent illness. Jobs is the quintessential key man and critical to the company’s profitability. While it would be impossible to replace him, key executive insurance or key person insurance (also called key man in less politically correct times), was developed to help Apple or any company deal with the death of disability of a corporate VIP.
Essentially, key executive insurance is a basic term life insurance policy, with benefit values ranging from half a million to $5 million. Key executive insurance coverage is typically issued for 10 to 20 years, or until the key person retires. The intent is to protect the company from the loss of a key team member and give the company the financial wherewithal to carry out a business plan, replace lost revenue, hire a temporary replacement and pay for the cost of recruiting and replacing the VIP.
Key executive insurance policies are critical if the success of your business is heavily dependent on the skills, knowledge or contacts of one or more individuals. The policy is owned by the company, which may opt to surrender its contract when the key person retires, and allow him or her to convert the key executive insurance policy to a permanent personal life insurance policy.
Key executive insurance premiums are assessed like term life insurance quotes. They depend on the age and health of the person insured and the amount of coverage requested, and can range from a few hundred dollars to several thousand dollars a year. An optional key person insurance coverage, first to die, can be issued to cover a group of key employees, but only paying benefits on the first death as the name implies. These are typically a more affordable key executive insurance option than carrying individual policies for several key persons. The premiums, by the way, do not qualify as a business tax deduction.
Increasingly, lenders, venture capitalists and other investors are making key executive insurance a requirement for funding, particularly for a start-up company. But even if you aren’t required by your investors to carry key person insurance, if you have a C-level executive, a partner, a majority stockholder, a management team or even a salesman whose services are vital to your company’s success, you need key executive insurance coverage.