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Is Keyman Insurance the Same As Life Insurance?

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Is Keyman Insurance the Same As Life Insurance?

Every business has that set of persons who are important to the property functioning and operation of the entity. These people are usually connected with the company on an employee basis. People who fall within these categories usually hold critical positions that have to do with the exchange of confidential information or the execution of critical processes.

These key employees or key stakeholders have either been in the company for a while, giving them the right amount of experience needed for the running of the company. They could also be persons with special talents that have a much-needed and in-demand skill set that the job requires. Now that we have established that every business or organization has this key personnel replaced?

In a situation where a business has tasks that rely heavily on one or two of the company staff, there is a high increase in the level of risk when there is nobody that can take their place in cases where they can no longer carry out their much-needed activity. If the key personnel in the company have a serious injury, an accident, passes away or ae no longer able to carry out their tasks, then keyman insurance becomes a very important asset to posses.

Now what does keyman insurance mean to you and how does it differ from other insurance policies available? It is an important question on both sides, the company or business, and the key employee. As a key employee, you might be wondering about the place of the life insurance policy’s death benefit when you are already covered by keyman insurance.

In the rest of this post, we will take you through what keyman insurance is, what it means to you, and how you can make sure your company, business, or key employees are covered.

What is Key Man Life Insurance and Why Do You Need Key Person Insurance Policy?

To be honest, rarely do we find a business that does not have specific staff they heavily depend on in the company. The effect is felt largely when personnel like these go on leave if at all they do. If the effects are s drastically felt when on leave, how much more when the key employee is injured or passes away and is no longer able to carry out their activities?

Examples of key leaders within an organization are the CEOs, founders, and other company leaders, some of which belong to the decision making board of the company. According to research, the death of an owner or CEO can lead to a loss o over 60 percent in revenue. We can therefore agree that the loss of a key player is a key factor in business success and a key man life insurance policy death benefit can make the difference in profit and loss where a key employee is concerned.

When Would Your Business Need Key Man Life Insurance?

Key person life insurance is a critical factor considered when a business or organization is seeking a business loan, especially long-term loans. key person life insurance is a requirement by federal banks and some privately owned financial institutions when it comes to meeting lending requirements for a business loan.

Since losing key employees can cause a loss in the revenue of the company, lenders want to be sure that insurance is in place to mitigate the effect of the loss with key man life insurance death benefit. As a result, most businesses and organizations opt for key employee long-term life insurance for financial purposes. Key employee life insurance is a long-term life insurance death benefit that prevents loss to profit when a key employee dies.

What Types of Policy Can be Used as Key Man Life Insurance?

A life insurance policy can also cover a key man life insurance, but a key man life insurance does not equal a full life insurance policy. A full life insurance policy is usually wholesome and costly, especially for small to medium-sized businesses. In such cases is where a key person’s life insurance death benefit comes into play. Key man life insurance is still life insurance with a death benefit except that it pertains to key man insurance in an organization or business.

In most cases, businesses and companies structure their key man life insurance as an employee benefit based on the company’s policies. One important factor to consider when considering different key man life insurance policies is the flexibility of the key man insurance plan. Some key man insurance financial protection plans cover term and permanent life insurance. In most cases, permanent life insurance is usually a key executive life insurance employee benefit in a situation where a key employee dies.

Purchasing key man insurance usually comes in two options. One of which is the cross purchase plan which is obtained for key stakeholders like the owner of a corporation as company owned life insurance in a situation where the owner of the company dies.

keyman insurance

How Much Key Man Life Insurance Coverage Do You Need?

There is no one-size-fits-all when it comes to measuring key man insurance or permanent life insurance policies. When it comes to key man insurance, one key thing to note however is that the cash value for permanent life insurance must equal what is needed for the repayment of a loan.

It can sometimes be hard to figure out the cash value on permanent life insurance policies for an insured employee and how much coverage you need. A loss of a single employee translates to a loss in sales operations, productivity, and hiring. To get an accurate overview of how much key man insurance you need, it is advisable that you consult an expert key man insurance company or financial professional.

When it comes to taking business loans, the bank will require some key man coverage depending on the amount. Some banks will specify key executive life insurance just to be on the safe side. The coverage you get will vary in cash value between employees according to the company’s needs.

If possible, it is advised to buy enough insured employee man life insurance to reduce loss to close to zero. In order to achieve this, you need to account for revenues or profits that are credited to the employees, company structure, and the expense of replacing the employee. Based on the type of life insurance policies you opt for, the cost per person for key man insurance is greatly different.

Key Man Life Insurance Income Tax Implications

Key man life insurance coverage is non-tax deductible and taxed-free if it is prepaid with after tax dollars. In the case of some businesses, especially small to medium-sized businesses, they might choose to deduct costs when employee’s taxable income increases based on company key person coverage policies. In most cases like this, the death benefits of the insured employee are paid in full. Most often, the death benefits for Keyman policies are paid in full without income taxes if the insured dies.

However, there is but one exception and it applies to corporations with corporate-owned life insurance death benefits where income tax deductible is concerned. There are tax implications to purchasing the policy, especially on permanent life insurance premiums. Unlike other life insurance policies, the price of permanent life insurance policy premiums can be better determined.

Is there a Difference Between Keyman Insurance and Life Insurance? 

Key man insurance and life insurance are usually mixed and confused to mean the same thing. However, they are quite different from one another. The main difference that lies between a key person policy and life insurance is that key person covers the business and what the business owns and can sometimes even be termed as group life insurance.

Life insurance, on the other hand, is a more generic coverage that covers private individuals and is not necessarily affiliated with a business or corporation. Key man insurance policy is a standard life insurance policy for both the owner and the business in case of a key man or key employee’s death.

A good key man insurance policy will be responsible for mitigating the effects by paying a set amount of money based on the agreements to cater for the losses to the company in the situation of a loss of a key person contribution. On the other hand, life insurance caters to individuals with dependencies. The breadwinner of a family, for example, is expected to have life insurance which will mitigate the effect of the loss of life on one’s dependencies like spouse, children, or family.

Key man insurance policy does not mean you do not still need to get life insurance as rather than you and your dependencies, the money from key person protection goes to the company or business instead. Your family members, relatives, and loved ones do not benefit from it, so to ensure everyone is well protected, contact a qualified insurance agent to weigh your options.

What Types of Businesses Need Key Person Protection? 

Key person death insurance is not for everybody and it is definitely not for every business as well. Understanding your business needs is key to knowing whether to not you require key employee life insurance policy in place. It will also help you determine what type of key person protection you should opt for in your company.

In certain cases, the CEO or an employee is easier to replace without the company or business suffering a major setback or loss. In such cases, though rare, the key man permanent life policy incase an insured person dies is not very necessary. However, in a situation where the sole proprietor is key to the running of operations, then a lifelong coverage should be in order. Like some employees, the sole proprietor is the firm’s top asset, and a loss might be almost impossible to replace, so the employee’s health whole life insurance should be a critical business expense.

If the business or company operations is based around a personality or celebrity, the person’s death can cause such a loss that can ruin the business for life. Pending the time a new, healthy employee or business strategy is in place to manage the situation, financial protection is a top option. There is also key man disability policy for personnel that suffers disability either due to injury or accident and can no longer perform their operations.

A key factor to note here is that key person insurance is tax deductible, which means, to an extent it is tax-free money. This saves you some extra money in such dire circumstances. however, tax treatment varies with financial institutions, and getting the right tax treatment is key to getting the right insurance company.

Determining How Much Key Person Insurance Protection You Need 

Key person insurance is needed by almost every business dealing with daily activities and operations. However, the extent to which it is required varies from company to company and firm to firm. It all comes down to the value offering of the key person involved and the effect of the loss of that value on your company. Consulting an insurance agent can help you with the key man insurance calculator to help you determine what you need.

How to Determine Key Person Revenue-Producing Value?

While there are different long routes to get around this, here is a very simple method to help you get started. It starts with the person’s contribution to your annual profits. Next is to determine how long is will take to replace the person and the effects it will have on your firm or company.

A key formula to apply here is the gross annual revenue multiplied by the key person’s contribution multiplied by two. You then represent the result as a percentage.

What Is the Person’s Non-Revenue-Producing Value?

We know well that not all contributions can be represented based on monetary value, which makes the initial formula limited in calculating producing value. Since not everyone doesn’t have a direct financial contribution to the company, here is a formula to make up for this.

If your key person is non-revenue-producing, you have to estimate how much the loss of this particular employee would cost your company and then use the cash value in a similar calculation as above. Since it can be hard to quantify someone’s cash value account, you should speak to your insurance agent, who can tell you how other businesses in your industry handle this issue.

How Difficult Is It to Replace the Person? 

Finally, the next thing to consider is your replacement plan when a key person dies and what your company pays to deal with the situation. In the other two scenarios, we are banking on a time frame in which a replacement will be available. However, what happens in a situation where a replacement is not? What situations like this mean for your business is that you will have a more rocky experience getting back on track in your company which in turn translates to more insurance, sometimes going well over a year. However, in a situation where you can determine a set timeframe, which is the only exception, insurance costs can be cut to more than half.

On a business exchange rider basis, key man insurance coverage is possible under business succession planning basis as a policy will automatically adjust from one employee to the other.

What Other Types of Insurance Does Your Business Need?

Company or firm insurance is not only limited to key person insurance. A business owner also has the option of key man disability insurance as well. There is also liability insurance as well as other types of insurance open to businesses and firms each with its different requirements and coverings, from corporate tax return to medical history.

Is Keyman Insurance the Same As Life Insurance?

Final Thoughts 

Key person life insurance or disability insurance protects your business a whole lot more than you think when you lose a key stakeholder or employee. This could be a revenue-producing employee, for example, a highly skilled worker, or it could be a non-revenue-producing person, like a leader or HR officer.

Call us at ISU Armac to speak to our agents about key person protection. We’ll be happy to provide you with quotes.