Chelsey Tucker graduated with a Bachelor of History degree from Metropolitan State University in 2019. She now writes about insurance with her specialty being life insurance and has been quoted on Help Smart Phone and MEL Magazine.

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Dan Walker graduated with a BS in Administrative Management in 2005 and has been working in his family’s insurance agency, FCI Agency, for 15 years. He is licensed as an agent to write property and casualty insurance, including home, auto, umbrella, and dwelling fire insurance. He’s also been featured on sites like Reviews.com.

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Reviewed by Daniel Walker
Licensed Auto Insurance Agent

UPDATED: Mar 19, 2020

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Who Needs Key Man Insurance

It may be a very prudent business decision for a business to invest in a key man insurance policy. A person who plays a vital role in the business may be considered a key person. A company may choose to insure one or several key people who play a very significant part in the operation of the business. This type of coverage can also be referred to as company owned life insurance.

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Similar in nature to Directors and Officers insurance coverage, this option is meant to make sure that your business will continue even if one of its primary players cannot. Unlike D&O coverage which can protect the organization from the improper actions or poor decisions of its leaders, key man or key person coverage is meant to protect the company from a person’s unexpected absence.

A perfect example of just a key man in a company was the late Steve Jobs, the man credited with the incredible success and meteoric rise of the stock price of Apple.

The co-founder of Apple in the 1970s, Jobs left the company in 1985 in what could be termed a power struggle. He returned as CEO in 2000 and, under his guidance, Apple became the most successful technology company in the world, worth twice as much as Microsoft. Jobs used his vision to lead the way with innovative products like the iMAC, iPOD, iTUNES and iPHONE, and also created the iconic Apple retail store. With Jobs recent passing, it remains to be seen how Apple will fare in the future.

The Corporate Structure and the Right Insurance

One of the main reasons that businesses choose to structure themselves as corporations is that it enables them to remain as an ongoing entity in the event that a key person or several key persons die or otherwise leave the company. While corporations do provide an avenue for succession and continuous operations over time, they can not guarantee a company will be as successful if key personnel are no longer involved with the company.

While no individual is bigger than a company, some people are much harder to replace. With funds from a key man insurance policy available to a company, the transition period will go more smoothly. Money can be used to:

  • Compensate for a temporary decrease in business— If you lose a key player, you may experience a loss of business. While you still have the same overhead and other business costs, you may not have the same revenue stream. You may lose customers in a beauty parlor if your star hair stylist quits and takes her clients with her.
  • How to Know When You Need Key Man Insurance

    Take time to do a thorough job search and select a suitable replacement– Key personnel like CEOs, star salesman or a head accountant may be difficult to find. It may take months of interviewing candidates

  • Hire temporary or immediate personnel in the event the key person becomes disabled and can not work– If someone very important is injured or incapacitated for a period of time, they may need to be away from the job for an extended period of time.
  • Meet bank or lender requirements for acquiring financing– Most Banks require a company to have such a policy in place before making a major loan. The bank needs reasonable assurance that if something happens to a key person that the company will not collapse and be unable to repay the loan.
  • Buying out a surviving spouse or family member– When the CEO or other high-ranking person dies their relatives often inherit their share of the company. A board of directors may decide to purchase the shares from the spouse and maintain control. The person inheriting part of the company may also want to simply cash out and go on their way.

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What Makes Someone a Key Man or Key Woman?

In a small business operation, there may be one owner who makes all of the major decisions. If they were no longer around to assume all of the responsibilities of the business, there would likely be no business. Following are a few examples.

What Makes a Key Man for Insurance Purposes

Imagine the owner of a bakery who is the only baker. He comes in at 4:00 am and bakes the goods that are to be sold. He has a dozen employees who serve the customers and deliver baked goods to area restaurants. If he should die or become incapacitated, the business stops and 12 people are suddenly out of work.

Another example is a highly skilled computer programmer who designed your company’s customized software and only she has intricate knowledge of how it works. If she is unavailable and something goes wrong, your organization will have to scramble to deal with the situation

Any unique talent that draws customers, business and sales qualifies. Singers, dancers and other performing artists are in a class of their own. After all, can you ever really replace a Lady Gaga or Beyonce?

Insurance Companies That Offer Key Man Policies

There are numerous “A+” and “A” rated insurers that will sell you what is essentially a term-life policy or disability policy. Just as with many other types of insurance products, these policies vary widely in price from company to company. It definitely pays to shop around to get the best policy for your money.

As an example, a recent online search comparing the annual premiums of several key man policies showed the following. A 20 year, $1,000,000 policy for a non-smoking, 40 year old man, in excellent health could be insured for as little as $75.

Most of the dozen or so insurers surveyed had premiums of $700-$1,000, but a few charged as much as $1,600 per year.

For the same scenario as above, except for a 50 year old man, the rates ranged from $1,900-$2,500 with one company charging well over $3,000.

When Your Business Needs Key Man Insurance

Read an opinion here on key man coverage from Smart Business .

The relatively low cost of a key man policy makes it an affordable way to protect your business in the event that a key member of the organization dies, becomes disabled or just chooses to leave. It is very important to consider the effect that losing such a person would have on the business’s ability to operate. Before purchasing a policy, be sure to shop around for the best possible price.

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