Key Man Insurance Definition
If your business’s success depends on one or two people, including business owners and founders, you might need to protect your business with what is known as key man insurance policy. With key man, or key employee, coverage the business owns the policy, pays premiums and is beneficiary.
Should a key individual die or become disabled, the payout goes to the business. Businesses of all sizes can have a need for key man coverage, but often a small business is particularly vulnerable because of its dependence on one or two people.
Companies often buy key man insurance for the following reasons:
- To protect the financial impact of the person
- To ensure continuity during transition
- To satisfy a possible requirement by financial institutions to show stability and staying power of a company
Who Is a Key Employee?
Is there someone in your business the company can’t do without? This could be someone who the company is dependent upon for bringing in a large percentage of the revenues. But the individual can also be the person who provides special expertise that would be expensive to replace or the individual who has developed a valuable product for the company that can be patented.
What Key Man Insurance Doesn’t Cover
As with all life insurance policies, it’s common for a key man policy to include a contestability period, usually two-years just after the policy goes into effect. If the insured person dies or is disabled during this period, the insurance provider can investigate to make sure the information submitted on the life insurance application are true.
Situations where key man insurance coverage is denied including:
- Suicide before an initial contestability period
- Purposeful dishonesty or misrepresentation
How Much Key Man Coverage Do You Need?
Generally, if you buy a key man policy you’ll want to get as much coverage as the company can afford. Get started by shopping around and comparing rates. Get quotes that reflect costs for coverage on $100,000, $250,000, 500,000, $750 ,000 and $1 million. As with all life insurance, select a policy that you can afford and pays out the amount suitable for possible transition needs.