Key Person (Key Man) Insurance

Key Person (Key Man) Insurance

Definition:

Key Person Insurance (aka Key Man Insurance) is a type of life insurance that is purchased to offset the expense and financial losses due to the death of a valued employee. This type of plan will provide funds for lost sales, recruiting cost, cost of training and cost of replacing the key employee.

What Makes A Key Person?

A key person can be anyone. What distinguishes someone as a key person is that his or her loss would severely impact a business until a replacement is found. Key people can be found in a variety of positions and with various titles such as:

  • An owner or non owner.
  • Management/Executives
  • Key Sales People
  • Key Technical People (Engineers, Scientist, Creative, etc)
  • The bottom line is that any person considered vital to the success of the business and essential to its profitable operation is a key person.

Quatifying the Amount of Insurance:

The amount of insurance coverage should reflect the estimated monetary loss the business would suffer from the death of the key employee. There are two frequently used methods to quantify the face amount of coverage:

  • For traditional deals, the general guideline is 5-10 times total compensation package (Salary, Deferred Comp, Stock Options, Retirement Plan, and Bonus)
  • For debt coverage deal, 50-70% of debt (less the existing amount of key person coverage already in force).

Getting Started:

Check out some of the addtional resources available for download below. Please contact us to request a quote or if you have any questions.