What Is Key Person Insurance?

Last modified: March 29, 2022

Key person insurance, also known as key man life insurance, is an insurance policy that a company purchases on an individual’s life who is considered critical to the business.  

What Is the Purpose of Key Person Insurance

The purpose of key person insurance is to protect the company if something happens to that person, and the company suffers financially. The policy pays a lump sum to the company if the key person passes away or cannot work due to an illness or injury. This money can cover the cost of finding and training a replacement and any lost profits the company may experience.          

Types of Key Person Insurance

There are three main types of key person insurance: term life, whole life, and permanent life. Term life policies provide coverage for a specific period, usually 10 or 20 years. On the other hand, whole life policies are permanent policies that provide coverage for the rest of the key person’s life.  

Permanent life policies combine features of term and whole life policies. They offer coverage for a specific period and have a cash value that builds up over time. However, if the key person survives past the term, they can continue to receive coverage, and the policy’s cash value will grow.              

How Does Key Person Life Insurance Work? 

If the key person dies, the company receives the death benefit from the key man’s life insurance policy. The company can use this money to cover the key person’s death expenses.     

What Is the Key Person Rule? 

The key person rule, or keyman life insurance tax treatment, is an IRS rule that allows a company to deduct the cost of key person life insurance from its taxable income. To be eligible for this deduction, the company must own the policy, and the key person must be an employee.  

Who Is Eligible for Keyman Insurance? 

Key person insurance is most commonly purchased by businesses reliant on a single key employee to generate profits. For example, a restaurant may purchase key person insurance for the owner/chef since they are essential to the restaurant’s success. However, any business can benefit from key person insurance, regardless of its size or industry.  

Is Keyman Insurance Worth It?    

Keyman insurance is a valuable tool for businesses that rely heavily on one or more individuals. It can help protect the business from financial ruin if that person dies.

While there is no guarantee that a key person will die during the policy term, the death of a key person could have a devastating effect on a company’s finances. Keyman insurance can reduce the risk of this happening and help the company recover if it does.             

Key Man Insurance vs. Life Insurance  

While keyman and life insurance offer many of the same benefits, there are some key differences.          

  • Key man insurance is designed specifically for businesses, while life insurance can be used by businesses and individuals.  
  • Key man insurance is a tax-deductible expense for the company, while life insurance is not.    
  • Life insurance pays out a death benefit to the beneficiary, while key man insurance pays the company’s death benefit.   

Who Should Have Key Person Insurance?

Any business owner or top executive who is considered critical to the company’s success should have key person insurance. The key person does not have to be the sole owner of the company, but they must play a vital role in its operations.   

Key Man Insurance Calculator

To estimate how much key man insurance would cost, use a key person insurance calculator. This tool will ask for some basic information about the insured person, such as age and health, and the death benefit amount. This will then provide a quote for the policy.      

How to Get Key Person Insurance 

To get key person insurance, you’ll need to apply for a life insurance policy that offers this coverage. You can usually find these policies through an insurance company or broker. Be sure to compare quotes from several companies to find the best rates.     

Transamerica Key Person Insurance

Transamerica offers key person insurance policies that can help protect your business in the event of the death of a key employee. These policies can benefit the company to help offset any losses incurred due to a key person’s death. Transamerica also offers a key man insurance calculator to help you estimate the cost of a policy. 

Key Man Insurance For Sole Proprietorship

If you are a sole proprietor, you may still be able to get key man insurance. This type of policy can help protect your business in the event of your death. You can usually find these policies through an insurance company or broker.         

Which Benefits Are Provided By Key Employee Insurance?

Key employee insurance can provide death benefits, cash values, and taxes. The particular benefits offered by a key person’s insurance policy will vary depending on the policy.       

Some Benefits of Key Person Insurance Include: 

  • The policy can help the company financially survive the death of a key person.
  • The policy can help the company to recruit and retain employees.
  • The policy can provide peace of mind for the employees of the company.

Transfer of Key Man Life Insurance to Employee 

It’s possible to transfer a key man life insurance policy to an employee. This can help the company continue to receive the policy’s benefits in the event of the key person’s death. The employee will need to be approved as a beneficiary of the policy, and the company will need to provide written consent.  

In Conclusion

In summary, key person insurance is a life insurance policy that a company purchases on the life of an owner, a top executive, or another individual considered critical to the business. The purpose of key person insurance is to protect the company if something happens to that person, and the company suffers financially. If the key person dies, the company receives the death benefit from the key man’s life insurance policy. 

FAQs

How Much Does a Key Person Insurance Policy Cost?

The cost of a key person’s insurance policy will vary depending on the key person’s age, health, and occupation. The amount of coverage the company needs will also affect the cost of the policy.     

How Does the Key Person's Age Affect Key Person Insurance Rates?

The key person’s age can affect their insurance rates because the older the key person is, the more likely they will die. This means that the company will be more likely to make a claim on the policy, which will cost more as a result.  

How Does the Key Person's Health Affect Key Person Insurance Rates?

The key person’s health can affect key person insurance rates because the healthier the key person is, the less likely they are to die. This means that the company will be less likely to make a claim on the policy, and the policy will cost less as a result.

How Does the Key Person's Occupation Affect Key Person Insurance Rates?

The key person’s occupation can affect key person insurance rates because some occupations are more dangerous than others. For example, a firefighter is more likely to die than a key person who is a banker. Therefore, the policy will cost more if the key person is in a more dangerous occupation.

Who Pays for Key Person Insurance?

The company pays for key person insurance. The policy is designed to protect the company from the financial losses that would result from the death of a key person. 

What Are Some Other Names for Key Person Insurance?

Key person insurance is also known as key employee insurance, key man insurance, and life insurance.

Can There Be More Than One Key Person?

Yes, a company can have more than one key person. The amount of coverage and the cost of the policy will depend on the age, health, and occupation of each key person. 

Can There Be More Than One Policy Per Person?

Yes, a company can have more than one policy per key person. The amount of coverage and the cost of the policy will depend on the age, health, and occupation of the key person.

What if the Key Person Dies While They Are No Longer With the Company?

If the key person dies while they are no longer with the company, the policy will pay out according to its terms. 

What if the Key Person Is No Longer With the Company?

If the key person is no longer with the company, the policy can be transferred to another employee or canceled. The company will need to prove that the key person is no longer with the company to cancel the policy.

Can I Cancel My Key Person Insurance?

You may be able to cancel your key person insurance policy. However, you should speak with an insurance agent to find out if this is possible and what the consequences would be. Canceling a key person’s insurance policy could result in significant penalties.

What Are Some Common Exclusions to Coverage Under a Key Person Policy?

Common exclusions to coverage under a key person policy include suicide, self-inflicted injury, and criminal acts. The policy will also not cover any losses that are not directly related to the key person’s death.