Key Person Insurance, also known as Key Man Insurance, is a type of insurance policy that a business purchases on a key individual within the company. The policy provides a financial cushion to the business in the event of the key person’s untimely death.
What is Key Person Insurance?
Key Person Insurance is designed to protect the business from the sudden, unexpected loss of a key employee. A key employee or key person is someone who is vital to your company and not easily replaceable. This could be a top salesman, a founder, or a CEO.
Calculating Key Employee Insurance Coverage
Calculating the coverage needed for a key employee can be tricky. A good rule of thumb is to buy key person coverage between eight to 10 times the person’s salary. Another way to determine coverage needs is to identify the key person’s monetary value to the business. This can be challenging but is a more precise way to identify coverage needs.
Types of Key Person Insurance
There are two variables to consider when discussing key person insurance:
- Key Employee: A non-owner, zero equity employee. (Example: top salesman)
- Key Person: An owner or shareholder with equity. (Example: founder or CEO)
The key person insurance calculator generates live calculations based on the information you provide.
Considerations Before Buying Key Person Insurance
Before buying Key Person Insurance, it’s important to consider the potential implications. For instance, if the individual you are seeking coverage for has equity in the company, then you’ll have to account for the price of their equity and involvement in the business.