Key man life insurance, also known as key person insurance or key employee insurance, is a type of life insurance policy taken out by a business on the life of a key individual within the organization.
This key man insurance policy aims to protect the company from financial loss or hardship that may result from the death or disability of that key person.
Key man life insurance is typically purchased by businesses that heavily rely on specific individuals whose knowledge, expertise, leadership, sales ability or contacts are critical to the company's success.
This could include owners, founders, executives, or key employees who have specialized skills or relationships with clients, suppliers, or business partners.
The policy is designed to compensate the company for the potential financial impact caused by the loss of the key person.
Main features of key man life insurance
Policy ownership: the business owns the policy, pays the premiums and is the beneficiary in the event of a claim. This ensures that the business receives the life insurance proceeds and can use them to mitigate the financial impact of losing the key person.
Coverage amount: The coverage amount is determined based on the estimated financial loss the company would incur due to the absence of the key person. Factors to consider may include the individual's salary, the cost and time of finding a replacement, lost revenue, and any additional expenses related to the transition.
Cost of key man life insurance: The premiums for key man life insurance are generally based on the key person's age, health, occupation, and the coverage amount requested. These premiums are NOT typically tax-deductible for the business.
Policy Type: Key man life insurance can be purchased as either term life insurance or permanent life insurance. Term policies provide coverage for a specific period of time, like 10 to 40 years, while permanent policies offer coverage for the entire life of the key person.
Underwriting Process: When applying for key man insurance, the key person may need to undergo a medical examination, but more carriers are allowing many people to qualify without an exam, depending on age and health of applicant and the total amount being applied for. The insurance company will assess the individual's health and other risk factors to determine the premium rate.
Determining amount of key person insurance
Key man insurance is insurance purchased on the life of a key employee or owner of a company. The intent is to cover expenses incurred as a result of the death of the key employee or owner.
Some examples are:
- lost sales or revenue
- hiring of interim staff until a permanent replacement is found
- costs associated with hiring and training a replacement employee.
- For example:
- $30,000 estimated lost revenue and sales
- $75,000 independent contractor costs as a temporary replacement
- $100,000 recruiter fees, advertising, and training of new employee
would then suggest that $205,000 of insurance should be purchased on the key employee.
Cost of a key man life insurance policy
Below are sample 10 year term monthly rates at $250k, $500k, $1million and $2million amounts for males and females in good health at various ages. Showing two rates as a range of best case cost:
Male | $250,000 | $500,000 | $1,000,000 | $2,000,000 |
|---|---|---|---|---|
Age 30 | $10- $12 | $13- $16 | $18- $24 | $30- $43 |
Age 40 | $12- $14 | $17- $22 | $26- $35 | $46- $64 |
Age 50 | $23- $28 | $40- $50 | $69- $89 | $131- $173 |
Age 60 | $53- $62 | $99- $117 | $191- $219 | $372- $431 |
Female | $250,000 | $500,000 | $1,000,000 | $2,000,000 |
|---|---|---|---|---|
Age 30 | $9- $10 | $11- $13 | $15- $20 | $25- $35 |
Age 40 | $11- $13 | $15- $19 | $24- $30 | $41- $55 |
Age 50 | $20- $24 | $33- $42 | $56- $74 | $106- $141 |
Age 60 | $37- $42 | $68- $77 | $132- $152 | $258- $297 |
What is best type of key man life insurance
Term life insurance is generally the best for key man insurance as the insurance may only be required until the retirement of the employee.
Occasionally the insurance policy is provided to the employee upon their retirement at which point they could convert it to permanent insurance for personal use.
This is not to say that permanent life insurance cannot be used for key man purposes. Some employers do buy permanent life insurance on key employees so that the employer will receive the insurance in the event of the employees death while still employed or the employee could receive any cash value in the policy upon retirement.
This is a complex subject. The above is intended as a very brief conceptual overview only. You should consult your accountant for assistance in determining potential costs and an experienced insurance broker to help you determine the best policy to cover this need.
Fill out the quote request form in link below to get the best quotes from over 100 life insurance companies in our database.
Key man life insurance tax treatment
While the life insurance death benefit payout is usually received tax free, the life insurance premiums paid by the business are not usually tax deductible.
The exception to this, would be if the business considers the premium payments to be included in the key persons taxable income which is uncommon.
The IRS will not allow both tax deductible life insurance payments and tax free life insurance death benefit pay out to beneficiary...it's usually one or the other!!
Difference between key man life insurance and life insurance
Only real difference between key man life policy and a "regular" life insurance policy is how the ownership and beneficiary are set up.
The policy owner and the insured on a personal life insurance policy are usually the same, and the beneficiary will usually be the spouse of the insured.
Whereas on a key man insurance policy, the owner and beneficiary are the business or corporation that employs the key person.
The term life or permanent products used are exactly the same on a key person policy that would be used on a personal life insurance policy.
Key Man life insurance with living benefits
Consider the benefits of this very unique key man life insurance policy that also pays living benefits and that we can offer you.
The Benefits:
- Pays a lump sum death benefit.
- Pays up to $25,000 in cash to the policy owner if the insured experiences a critical illness such as a first heart attack or even just a first angioplasty or first bypass surgery, stroke, invasive cancer, etc.
- Pays up to $250,000 in cash to the policy owner if the insured experiences a chronic illness for which they can no longer work but they have not died but home health care, assisted living or nursing home care is required.
This may be the ideal key man life insurance policy for any employer looking to insure a key person.
Fill out the quote request form in link below to get the best quotes from over 100 life insurance companies in our database.
Please also feel free to call or text us at 800-380-3533 or email us at [email protected] if you have questions or need more information.