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Key Man Life Insurance
Key Man life insurance, also called Key Person insurance, protects an employer against the death or incapacity of a key employee. The employer takes out a Key Man life insurance policy to cover the key employee’s health or life where that individual’s intellectual knowledge, work ability or overall business acumen is considered vital to the successful operation of the company’s business.
In the event that such a key person dies, or is unable to contribute to the company because of ill health or a work accident, the policy would be activated paying the company a financial benefit to assist in finding and training a suitable alternative employee. The policy would also mitigate against any loss suffered by the company due to an inability to continue its business as before when the key person was fully employed. Such an event is likely until a new person has been trained to a sufficient level to take on the workload and responsibilities of their predecessor. Key persons are normally officers in a company such as executives or shareholders. They may also be key personnel such as chief engineers, top sales persons or senior instructors.
Key man insurance can determine whether a business plan is carried out, even if a key person dies. Premiums will be determined according to the key person’s age and health, with younger, fitter key persons requiring lower premiums than their older, less fit counterparts. Policies can be costly with premiums mounting up to thousands of dollars per year. Large companies can also purchase “first to die” policies that cover a number of key individuals in a company. Such policies are more cost effective allowing the survivors to take out an adjusted policy once a key person on the team has died.
Today, venture capital companies often require key members of the companies they fund to take out key man life insurance. If a key member of the start-up company should die, funds are then transferred to the new company or in some cases back to the venture capital financers. Such a structure is designed to protect the financial backers of these often risky enterprises.
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