If you’re a business owner who is looking at protecting your business long-term, then having insurance will be one of the best options. You may say that there are so many kinds of insurance. So which one is important? Are you aware that there is such a thing as a keyman policy or keyman insurance?
Perhaps one of the most underutilized life insurance by a lot of people is keyman insurance. It’s very useful insurance for business owners and can help protect their businesses long term.
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What Is Keyman Insurance?
The short answer: it’s life insurance made for business owners, CEOs, and other important people in the company. Typically it’s meant to protect business owners and CEOs of companies.
The long answer is otherwise. Keyman insurance is typically bought by the company to insure and protect the business owner or CEO. Businesses usually buy these kinds of life insurance policies mostly because the business owner or CEO is usually a person of importance in the company. Losing such a person (or key figure) will have adverse effects on the company, long-term or not.
Most times, it’s usually small businesses who buy such insurances because of their business size. However, you will find that bigger companies and corporations buying such insurance too.
However, you will find that not only do companies buy keyman policies for CEOs and business owners. You will also find that companies may buy the very same keyman insurance for a non-CEO employee, just as long as that employee has significant importance within the company.
How does Keyman Insurance Work?
When a company buys a keyman policy to insure the person of interest, the company will bear the premium costs and any accompanying costs that come with the policy. The insured person will not have to pay for the keyman policy however there are cases where they may have to foot the premiums themselves (less likely).
Just in case if the insured person passes away, then the company will get the death benefit (and accompanying benefit that comes with it). The money received from the keyman policy often covers the costs of recruiting, hiring, and training the new hire to replace the very same deceased person.
If the company believes that it cannot continue its operations, it can choose to use the money to pay off debts, distribute money to investors, and whatnot. Sometimes they may use that money to pay employees’ severance packages, then close the company down in an orderly manner. In simpler understanding: keyman policies provide several choices for businesses to opt into. It helps the business decide whether it can continue, or cease all operations upon the death of the key insured person.
To go for these kinds of insurance coverage, businesses often have to decide whether the person of interest is irreplaceable in the short term. If the person of interest is an important person (hence keyman) who does almost everything in the company, they can consider getting the coverage. This is because, without this person, the business operations can come to a stop.
What is Covered by Keyman Policies?
Keyman insurance usually covers the death of the insured business owner (typically). It’s a ubiquitous coverage you can find across all keyman policies. However, there are several other coverages that keyman policies offer.
- Protect business profits. Business can offset payment by using the benefit payout to pay for any outstanding money owed to other companies. This is provided that the projects are under the keyman policy insured person.
- To protect shareholders and partnership projects. Usually, this allows and enables partners to buy the deceased’s financial shares and interests.
- Coverage involving in guaranteeing business loans or banking facilities. The insurance value is equivalent to the value of the guarantee in this case.
How Much Does a Keyman Policy Cost
The premiums of a policy usually depend on the size and nature of the business, and the insured person’s role in the company. Other contributing factors of an insurance policy premium include what comes with the package. However, the death benefit (sometimes called basic sum assured) can vary. It can be $50,000, $100,000, $250,000, or even $1mil. It’s worth asking the insurance companies for quotes for each death benefit amount.
However, remember that just because you want to have a $1mil basic sum assured and have the money to pay for it, it does not mean the insurance company will give. Insurance companies have criteria to check off to see whether if the insured person is “worthy” of such a sum.
Insurance companies also often have to do background checks to see if the insured keyman has already had other insurance policies. The insured keyman or person of interest already having other policies may affect the death benefit amount. However, different companies have different sets of rules and policies. So with some insurance companies, you may get a higher basic sum assured at the same price other companies are giving with a lower death benefit.
Just remember to ask for quotations from different insurance companies. Then do a comparison of which is the better one for your person of interest.
Who Pays for the Keyman Policies?
Generally, it is the company that pays for the keyman policy premiums. Since that, it is the company who wishes to insure the important person in the company anyway, so it is only natural that they pay for it.
What if, in any given circumstances, the keyman decides to quit their current company and work with another company instead? There are 2 possibilities to it.
- The initial/original company will stop paying the premiums. They can choose to stop entirely or wait until they have found another keyman to insure. Then they continue insuring the new keyman they have appointed to protect.
- The keyman policy will be transferred to the new company with the keyman. When this is done, usually the new company will continue paying the premiums if the terms are agreeable. However, they can choose not to pay for the premium for reasons that are their own.
Keyman policies are great for small companies who do not have a lot of money to tide them over when the owner dies. That is why keyman policies are made to protect the companies’ interests at heart, just in case if anything happens to the insured keyman.