What is key man life insurance?

quick Facts

  • A business or small business buys key person insurance and pays premiums to cover the life of an important owner, executive, or employee
  • Key persons life insurance protects companies from immediate bankruptcy by covering the cost of training and reassignment of a replacement in the event of the death or disability of a critical employee
  • Companies can use term life or permanent life insurance policies as a person’s primary insurance

Do you need key person insurance? A small business or company will purchase key person life insurance if the business is going to suffer financially after the death of a key employee. The employees considered key to a company are usually the business owners or C-suite executives with intimate knowledge of the company’s plans and operations.

This type of life insurance is often referred to as principal man’s insurance or company-owned life insurance (COLI) since it is owned by the business entity and not the insured employee.

Since the company buys the policy, it is responsible for paying the monthly life insurance rates. but, How much does life insurance cost For a key person it still depends on the age, gender and medical history of the insured.

Keep reading to learn more about primary person life insurance, when you need it, and how to determine the best policy limits based on the future needs of your business.

What is principal person insurance?

A key person policy is a type of life insurance used by a business or small business to protect itself against losses and bankruptcy after the death of an essential employee.

If the insured employee dies, the benefits from the key person policy will cover any costs associated with either training and hiring a replacement or closing the business responsibly.

For example, business owners can use death benefits to cover severance packages for other employees in the event the business closes after the death of a key person.

An essential employee is any person whose death will negatively affect the overall success of the company. Key employee life insurance can cover a business owner or partner, a senior executive, an engineer with specialized talents, or a salesperson responsible for a significant portion of the company’s revenue.

Life insurance quotes are always free.

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When does your business need key person insurance?

If you have a business loan, your lender will likely require some type of key man insurance policy on yourself, your business partner, or another essential employee. Investors may also require insurance for key employees to protect their losses in the event of death or permanent disability of those employees.

Principal life insurance will also protect you if you do not have employees. For example, business partners can use the benefits to purchase shares of others in the event that one of them dies or becomes incapacitated and unable to work. This type of policy is often referred to as partner insurance. Learn more about when you may need it Buying life insurance for someone else.

How does key person insurance work?

Business owners and company leaders can take out primary employee life insurance at any time. The insured employee has no say in the type of policy purchased or the limits of the policy, but the company must notify and receive written permission from the employee to take out the policy.

Like traditional life insurance policies, principal person policies have three parts.

  • The policy owner is the entity that owns the policy and pays the annual life insurance rates.
  • The insured is the one covered by the policy and for whom the allowance is received upon his death. Annual rates are directly related to the insured’s medical history and lifestyle.
  • The policy beneficiary is the entity that receives the benefits after the death of the covered insured.

The main difference between principal person life insurance and traditional policies is that the owners of the principal persons policy are also the beneficiaries of the policy.

This means that the company purchases the policy, pays the annuities, and receives financial compensation to cover labor costs directly related to the death or disability of a key employee.

Types of life insurance that you can use as your primary persons insurance

Life insurance for key employees can be a term or a permanent policy, depending on the needs of the business.

  • Life insurance. It covers the insured for a set number of years at much lower monthly rates than whole or permanent life insurance.
  • Permanent life insurance. It covers the insured for his entire life and provides a cash value savings account.

There are pros and cons to each type of life insurance, so consider the following before purchasing principal person insurance.

As you can see, permanent policies provide coverage for life, which may not be necessary because business needs often change. This is why the term life insurance is commonly used as a man’s main coverage. Term policies last between 10 and 20 years, although some life insurance companies offer coverage as long as 40 years or as short as five years. compare Term versus whole life insurance to learn more.

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How much does key person insurance cost?

The cost of key person insurance depends on many different variables, including:

  • Type of life insurance policy
  • policy limits
  • The age, gender and health of the insured employee

Term insurance rates are more expensive than life insurance rates, and your business loan may also require a certain amount of coverage. Higher limits lead to higher monthly rates, so it’s best to get life insurance quotes for different policies to compare the costs of each.

Start comparing monthly life insurance quotes here with this table showing life rates and whole life rates for your $100,000 insurance policy.

Monthly insurance costs will increase with higher policy limits, so compare quotes for $250,000, $500,000 and $1m with the comparison tool below to get the best rates.

Personal life insurance and taxes

Is life insurance taxable?? While death benefits are not taxed, principal person life insurance payments are not tax deductible. This means that the company pays the annual premiums for the policy with the after-tax income, which can affect how much your business is willing to pay per month to cover the principal.

If your company wants to deduct life insurance payments, consider offering group life insurance to your employees. This type of life insurance covers the funeral costs and family benefits for insured employees. In addition, the company covers a portion of the group’s annual premiums so employees can pay lower rates.

How to buy primary person insurance

Deciding to purchase key person life insurance can save your business from bankruptcy after the death of a business partner or key employee. If you have a business or investors loan, you may be required to have principal or principal insurance on yourself or other essential employees.

Essential personnel typically include C-suite owners and executives, engineers, and salespeople who know the inner workings of the company or are responsible for a significant amount of revenue.

However, the trick to saving money on employee life insurance comes from knowing what limits you need and what type of policy to buy. Companies can choose to purchase term or whole life insurance to cover a key employee, but the policy limits will vary depending on the following:

  • The compensation multiplier determines the cost of hiring this key person annually.
  • The earnings percentage indicates how much revenue a key employee brings in to the company each year.
  • Rehire cost is the total cost of finding, training and reassigning a suitable replacement for the key employee, including loss of revenue while the position is vacant.

If you are not sure how much life insurance your business needs, use Life insurance calculator To get an idea of ​​how much coverage to purchase. You can also enter your zip code below to compare life insurance costs from companies in your area.

Frequently Asked Questions

Who is the holder of a principal person life insurance policy?

The company or small business that takes the policy and pays the premiums is the principal person policy owner. The company can transfer key person insurance to the employee as a benefit, but the employee may be required to pay taxes on any benefits he receives.

What does a key person policy pay for?

Key person insurance can pay for the costs of hiring and training a replacement after the death of a primary employee or employer. Alternatively, companies can use the benefits of the policy to cover closing costs, including severance packages, to close a business without filing for bankruptcy.

Is primary person insurance the same as life insurance?

Yes, but only in the way that both types of policies pay a financial benefit after the person dies. The difference between personal and key employee life insurance is that key employee life insurance pays benefits directly to the business and covers business-related costs rather than funeral costs and family benefits.

Employees and business owners must purchase a personal life insurance policy to cover funeral and burial costs or pay any benefits to family members and loved ones.

Life insurance quotes are always free.

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Editorial Tips: We are a free online resource for anyone interested in learning more about life insurance. Our goal is to be an objective third party source for all things life insurance. We update our website regularly, and all content is reviewed by life insurance experts.

Rachel Brennan has been in the insurance industry since 2006 when she started working as a licensed insurance representative for 21st Century Insurance, during which time she held her property and casualty license in all 50 states. Several years later, she expanded her expertise in the insurance field, earning a license in health insurance and AD&D insurance as well. I worked for a small health in…

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Rachel Brennan
Licensed insurance agent
Rachel Brennan

Benjamin Carr was a licensed insurance agent in Georgia with two years of experience in life, health and property and casualty insurance. He has worked with State Farm and other risk management firms. He is also a strategy writer and editor with a background in branding, marketing, and quality assurance. He’s been in military newsrooms – literally on the front lines of journalism.

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It has been previously reviewed

Benji Carr

Previously Licensed Life Insurance Agent

Benji Carr

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