Life Insurance: Key Man Insurance

Consider, as a business owner, what would happen to your business if an essential employee were to pass away.  How long would it take for your company to recover?

Key Man Insurance pays a one-time lump sum payment to the company if a key employee dies. This payment is designed to support the firm financially through the transition period, and will allow them to recruit and train a suitable replacement.

This key person can be anyone who is considered integral to the business. It often refers to someone in upper management. However, it can also include a top employee, such as an important salesman or project manager.

If an employee were to pass away without having a Key Man Insurance policy, the company would have to replace the key employee without financial support.  This type of coverage could also be applied to shareholders (Buy-Sell Agreement).  As well, Key Man Insurance can also insure a key employee against disability and/or critical illness.  

For example

A software company wants to protect their best salesman, Jim. They depend on his skills and connections to generate leads and close the sales. Jim has been with the company since 2001 and the company recognized his importance by taking out a Key Man Insurance policy in 2004.

Five years after signing the policy, Jim is in a car accident and passes away.  The policy would pay a lump sum to company to supplement the cash flow shortfall that his absence will create.  This lump sum can be used however the company sees fit, however it is aimed to help with the additional costs of finding a replacement, training costs, lost productivity, pay debts, and make up for the loss of sales for which Jim was responsible.

It should be emphasized that Key Man Insurance protects only the company. Jim?s family would not receive any money from this policy. There are other arrangements that can be made to secure Jim?s family?s financial well being:

Group - To be set up by the company
Personal - To be set up by Jim