Why key man insurance makes sense for company partners

Save your business if you lose a business partner or executive to your company.

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Some employees are crucial to the ongoing success of your business. If a key person suffers a serious illness or dies, your business could suffer financially. Protect loss of profits, ownership, or the general day-to-day management by taking out a key man insurance policy. You might’ve also seen key man insurance referred to as key person insurance or key employee insurance.

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What is key man insurance?

Key man life insurance is a policy that protects profits and management in case a key executive or partner dies. The company is the beneficiary of the policy, and the payout is designed to buy time to find a replacement or figure out a way to save or sell the company.

Benefits of key man insurance

Key man insurance can pay for and offer protection against:

  • Lost revenue. If a talented salesperson passes away or a big project has to be cancelled, the lost revenue can be offset.
  • Recruiting. Pays for training a replacement to handle the essential tasks the key person was responsible for.
  • Funding future growth. The sum paid can be used to find new opportunities, secure loans and provide for business expansion.
  • Retaining clients. If an employee has cultivated successful relationships, then key man insurance can help pay for gifts or services to maintain a connection with your customers.
  • Outstanding debts. The insurance payout can settle any business loans or debts held by the key man to maintain your business’ credit rating.
  • Ownership transitions. The insurance payout can fund the acquisition of shares from the deceased’s beneficiaries and otherwise pay for the costs of transferring ownership.

How much does key man insurance cost?

The cost of key man insurance varies between insurers, and tends to cost the same as a personal insurance policy. Providers consider the following when determining how much you’ll pay:

  • Type of policy. The choice between term and permanent insurance can mean the difference of thousands of dollars.
  • Death benefit. The higher your payout, the more you’ll pay in your premium.
  • Lifestyle and health risks: The age, health history, lifestyle and driving history are among some of the factors that life insurance underwriters consider when determining your premium.
  • Size of the company. Generally the larger the company, the higher the premium.
  • Industry: Industries that are considered risky, with large machinery or factories could pay more than a low-risk office space.

The amount of coverage you get should be enough to cover your key person’s stake in the company. For example, if you own a business valued at $100,000, and your partner owns 50%, her policy should be at least $50,000.

Find a key person life insurance policy today

Name Product Issue Ages Coverage Range Medical Exam Required State Availability
18 - 85 years old
$10,000 to $10,000,000+
Depends on provider and policy
All 50 states
Compare affordable quotes from 12+ A-rated life insurance companies side-by-side.
20 - 60 years old
$100,000 to $8,000,000
No
Not available in New York
Term life insurance with no policy fees and the freedom to cancel anytime. Simple application process that can get you approved for coverage instantly.
21 - 54 years old
$50,000 to $1,000,000
No
Not available in Alaska or New York
Affordable 2-, 10- and 20-year term life insurance policies. Instant quotes and no medical exams.
18 - 64 years old
$100,000 to $3,000,000
No
All 50 states
Customized term life insurance policies up to $3 million, no medical exam for certain applicants.
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Sproutt
18 - 100 years old
$50,000 to $3,000,000
No
Available in all 50 states
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Can key man insurance protect business partnerships?

Key man insurance helps solve several difficult financial situations that can emerge following the loss of a critical individual. Taking out a policy means deciding who your business simply couldn’t do without and getting them insured.

In some cases, two executives might personally take out key man policies on each other, or the entire board of a company might insure each other in the business’ name. The proceeds of the policy can then be paid directly to the business or to an individual.

How business partnerships take advantage of key man insurance

  • Succession planning. The shares held by the key person are usually transferred to their family or other beneficiaries if they pass away. Key man insurance can provide the funds needed to buy them back and smoothly transfer ownership. If there are buy/sell agreements in place where stakeholders have entered into a contract on what to do with their shares upon death, then the key man insurance payout can facilitate these plans.
  • Business debts. What if the key man puts his or her name on business loans before passing away, or personally guaranteed loans made to the company? Key man insurance can be used to pay off the debts of a business partner in order to maintain the company’s reputation and credit rating.

Case Study: Surviving a key loss

Richard and Bradley’s financial services company had been in operation for just over a year. Rich handled most of the numbers and behind-the-scenes work, while Brad maintained client relationships and focused on sales. With the help of their insurance broker they found a good key man policy and each took one out on the other, nominating the company as the beneficiary.

In a tragic misfortune, Brad was involved in a fatal car crash, colliding with both another car and a billboard. He died instantly, and Brad’s wife inherited his half of the company. It was now Rich’s job to reacquire company ownership.

Using the lump sum paid from key man insurance he made Brad’s wife a solid offer, which she accepted. Having required full ownership, Rich paid off debts and used the rest of the funds to recruit and train a replacement.

What happens if there’s no key man insurance?

Without key man insurance there would have been some implications:

  • Brad’s wife would have had the stock in the company. Stock that she might have wanted to sell.
  • Rich may want to buy stock back. However, Rich may not have had the cash to pay for Brad’s portion of the company.
  • Lose-lose situation. Without the adequate funds to buy out Brad’s wife’s ownership, Richard may have low-balled her. Alternatively, Brad’s wife could have sold to another buyer and offset the course of the company.

When will key man insurance pay out?

In the context of business partnerships, key man insurance can pay out if a business partner:

  • Passes away
  • Develops a serious medical condition
  • Is disabled due to an injury or illness

    Is key man insurance tax deductible?

    No, the insurance premiums are not tax deductible. The only situation in which premiums would be deductible is if the business does not benefit from the insurance policy — meaning the death benefit is paid to the key person’s family, and not to the business.

    Are there alternatives to key man insurance?

    There is no direct alternative to key man insurance, but there are other options which might be preferable for your business in the event of the loss of a key person:

    • Take out a loan. This is another way to access funds at a crucial time and because it’s done after the loss of your key person, you can accurately judge how much you’ll need. However, lenders may be hesitant to offer money to a company that’s just lost a key person — or they may offer poor rates.
    • Cover the loss with company profits. If you’ve accumulated a reserve for emergencies, you can recover from the situation with the current year profits. Naturally this is only an option if your business is sufficiently profitable, but it might not be best for the bottom line.
    • Sell off assets. This can help you raise money fast, but you generally won’t get your money’s worth. Businesses generally don’t hold unnecessary assets, so you’ll likely be selling off useful equipment.

    Bottom line

    Key man insurance could keep your company operating during a difficult time. Talk to your business partner to see if a key man policy is right for you. Compare life insurance policies to find coverage that’s flexible and makes sense for you.

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