Jeffrey Manola is an experienced life insurance agent and the founder of Top Quote Life Insurance. His mission when he created Top Quote Life Insurance was to provide online consumers searching for life insurance with the absolute best quotes for term life insurance, permanent life insurance, no medical exam life insurance, and burial insurance. Not only does he strive to provide you with the ...

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Leslie Kasperowicz holds a BA in Social Sciences from the University of Winnipeg. She spent several years as a Farmers Insurance CSR, gaining a solid understanding of insurance products including home, life, auto, and commercial and working directly with insurance customers to understand their needs. She has since used that knowledge in her more than ten years as a writer, largely in the insur...

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Reviewed by Leslie Kasperowicz
Farmers CSR for 4 Years

UPDATED: Nov 4, 2020

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You have life insurance to protect your family in the event of your death, but what’s protecting your business? 

If you’re the owner of a business, ask yourself the following questions:

  • Where do you see your business years down the road?
  • Do you want your business to continue after your death?
  • Is your family equipped to take on the burdens of running a business? 
  • Would you like your employees to continue to operate your business?
  • Are there any other company leaders crucial to the survival of your business?
  • How would you like your employees’ taken care of?

These questions aren’t easy, but they are necessary in keeping your business staying in operation after your death. 

Let’s learn more about what a key man life insurance policy is, how it works, and why it’s so beneficial for your business and family:

Looking to compare life insurance policies? We can help. Enter your ZIP code to get free quotes from multiple insurers.

What is Key Man Life Insurance?

A key man (key women, key person, key employee or key executive) policy is essentially life insurance to protect your business. The key man, or key person, is an individual whom the policy is taken out on.

The reason this life insurance coverage is purchased on the life of the key person is to protect the business from financial hardship due to an unexpected death.

These types of employees are often considered to be:

  • An employee whose sudden death would have a major impact on the survival or continuity of operations of the business.
  • An employee who possesses skills or holds a position that is hard to find a replacement.

The proceeds received from the life insurance policy are used not only to help keep the business operating with day to day operations, but also to help aid in replacing a key asset of the company.

Who is considered to be a key person?

Your key person could be any of the following company positions:

  • You, the owner or co-owner
  • Founder and co-founder
  • Partners
  • Vice president
  • General manager
  • Top salesman
  • Employees in vital key positions

Essentially, a key person can be any leadership role that’s absolutely critical to the survival of your business. This individual would be considered is a prime candidate for key man insurance.

Should the sudden death of a key person arise, this policy can cover the following expenses:

  • Payroll expenses
  • Supplies and inventory expenses
  • Storefront maintenance costs
  • Store rents and leases
  • Utilities and internet
  • Severance packages
  • Employee health insurance
  • Company debt

This not only helps your business weather the change, but it takes an extraordinary burden off your family’s plate during a difficult time. 

Now, let’s move on to how these policies work. 

 

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How Key Man Life Insurance Works

By now you should have a good idea of what key man policies are, so let’s break down how they actually work. 

  • Identify the key persons who are integral to company survival.
  • Purchase policies on those key persons. This can also be yourself, the owner. 
  • The company itself becomes both the owner as well as the beneficiary of the policy. 
  • The company pays premiums on those policies. 
  • In the event of a key person’s death, the company will receive the death benefit proceeds. 

The next question is, how much insurance should you buy?

There are different ways to approach this. 

You can calculate a ballpark estimate of how much your business will need based on sales history and forecasts for example. 

However, a generally accepted rule of thumb is to purchase what you can afford, so what premiums can you reasonably pay?

This is why purchasing the right policy is crucial.  

When shopping for a key man policy, your best bet is to choose a term policy.

Why? 

Affordability. The premiums are much lower than permanent insurance, and often more appropriate for a business. This isn’t personal life insurance, and you may only need a key man policy to cover a few expenses or a replacement just until the key employee retires.

When researching quotes, think about the most pertinent needs of your business. 

 

Key Man Policies are Crucial for Small Businesses

Speaking of, key man policies are particularly helpful for small businesses and startups.

With a small business there’s a lot of responsibility to go around, but few people to take it on, so the sudden absence of a key person can immediately upheave or even close that business permanently. 

In the case of these businesses, key man insurance can literally prevent bankruptcy.

However, some businesses may fold because the key person’s image or brand is center to the company’s marketing or profit share.

For example, when a popular band member dies or leaves their band, that band may break up because that person was so key to the band’s success and brand recognition.  

In the unfortunate event that your small business can’t weather the financial hit, a key man policy can help cover the many expenses and burdens of closing down shop. 

These expenses may include:

  • Vacation time pay outs
  • Multiple severance packages
  • Distribution of investor dividends
  • Past due invoices and other final debts
  • Deposit final paychecks
  • Paying a liquidation company
  • Payments of any outstanding SBA or bank loans

All in all, your key man policy can make all the difference in ensuring a smoother company closing. 

 

Set the Stage for An Effective Policy Roll-Out

The best case scenario is your businesses surviving and thriving in the absence of a key person, and a key man policy works best when the right interim leaders are at the helm of your ship. 

So how do you ensure your business can weather the storm?

You need strong company leadership in place. 

That’s why it’s crucial to promote the following organizational traits from the get-go:

  • Personal ownership: when employees are personally invested in the company they work for, they go above and beyond to ensure it’s operating at its best. 
  • Company culture: develop a company culture that promotes personal ownership, empowerment, and a sense of community. You want all hands on deck!
  • Communication: you need efficient communication channels and practices in place to manage sudden absences and key man policy funds. 

Moreover, you can sit down with your team to draft a key man plan, so to speak. 

Doug Messer, CEO and co-founder of University Beyond, had this fantastic idea: In the event of you or your key person’s death, make sure you already have a secured folder containing any essential documents and tools interim leaders would need. 

A strong plan increases your business’s chance of weathering the toughest of times, but it’s your insurance policy that gives your business the funding they need to fight on. 

So let’s recap what you need to do:

  • First, make sure you have a strong team in place, that you trust, who can take the reins in your absence. 
  • Draft an “emergency” plan that your team can put into effect immediately.
  • Choose a key man policy that makes the most sense for your business’s needs. 

You’re proud of the business you built, so why take any chances with its survival? 

Purchase a key man policy today to make sure it’s in great hands. 

Looking to compare life insurance policies? We can help. Enter your ZIP code to get free quotes from multiple insurers.