Why Key Man Insurance is Important

First off, what exactly is key man insurance? Key man insurance is basically any sort of insurance a company takes for a certain employee (or employees) who is (are) perceived as integral to the company’s success. Not every employee is eligible for key man insurance, as the policy is given completely at the discretion of the company and only very few employees are eligible. The basis is, of course, performance, and not just any sort of performance, but performance that is of considerable use (and profit, naturally) to the company.

Why take a key man insurance policy?

Many companies take key man insurance policies simply because it is a very viable and practical business decision to ensure the safety of employees essential to the operations of the company, as well as have a fallback in case of any untoward incident that will render the said person incapable of continuing the fulfillment of his or her obligations to the company. Taking out a key man insurance policy gives all these benefits. Many lenders, business partners, and investors also prefer that a company have taken out a life policy on behalf of their key employees, as it shows that the company is willing and able to protect their assets, employees included – especially integral and essential persons in the organization.

What is needed for a key man insurance policy?

Most often, a company’s board of directors have to agree to provide life insurance for a particular employee or executive. Once there is a consensus between the members of the board, the employee in question is notified and asked if he or she accepts a life insurance policy that the company has taken out on them on their behalf. Key man insurance usually comes in two forms – the permanent life insurance policy, or the cheaper and transferable term life insurance policy. The latter form is more fluid, allowing it to be given to the employee as a retirement benefit, or transferred to another employee in case the recipient passes away or resigns or retires.

Management usually launches a full evaluation procedure to determine whether or not an employee truly warrants a life insurance policy taken on his or her behalf. The main consideration, of course, is the projected status of the company in case this person were to, for any reason, leave his or her post abruptly. Estimates are made in terms of loss of productivity and the reflection of this on the profit of the company, as well as the effort and cost of replacing him or her. The position of course, is something not just anyone can fill, and is always a high-ranking position. Companies are also usually required by the insurer to outline a financial disaster plan before a key man insurance policy is approved.

There are several factors that determine whether an employee warrants a key man insurance taken out on him or her, besides his or her being essential to the company. He or she has to be physically fit and have a generally good medical history, and be just the right age (older people tend to be higher risk).