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A policy that has been obtained on the life of an executive or a senior employee whose death could have a significant impact on the company is known in the US as "Executive Insurance". Another term used for the insurance is "key man insurance”. This term is used due to the fact that the insurance is based on the life of a key person in a business. Small businesses usually obtain it on the owner or founder or anyone whose absence would cripple or kill the company.
The policy is paid for by the company and if the key person dies, the company gets paid by the policy. The money obtained can be used to either replace the person or to pay off the debts, pay the shareholders of the company and give severance to left over employees should the company need to shut down. Basically, the policy is used to obtain time so as to shut down gracefully instead of filing for an immediate bankruptcy.
Which Companies Need Key Man Insurance?
This policy is not required by all companies. If your company is a solitary proprietorship or run by a single person, then personal life insurance will cover the losses for your family. Key man insurance is required by companies or partnerships where the loss of a particular person can cause catastrophe to the other partners or employees working in the business. Also, investors may persist you have key man insurance on key employees of the company prior to when they will buy shares in the business.
How Much Key Man Insurance Does My Business Need?
You would need at least enough to replace the position with another person in the short term. The number of key persons should be considered and a policy should be taken on all of them. Another aspect to consider is just how long it would get the business back on its feet and pay all debts, or how much it would take to elegantly shut the company down. Just like regular life insurance, the key man insurance premium is based on the health history and present health of the employee, their age and salary, so this is a factor you would have to consider before paying out for this type of insurance.
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