Insuring Your Key Employees

A well-performing company is the result of many skilled professionals – and typically the result of one to two key employees, usually the business owner or top executive. These individuals often carry a host of knowledge and expertise that could be devastating to the company if they were injured and unable to work, or if they died. Without their help, some businesses may not be able to survive. To help reduce these risks, key employee life and/or disability insurance coverage can help. Read on to learn how this coverage works, types of policies and how to decide if you need key man insurance.

What Is Key Person Insurance?

At a high level, key person insurance — also known as key man insurance — is an insurance policy a company takes out on an important individual. The company is responsible for paying the premiums and is the listed beneficiary in the event the individual dies. The insurance payout is meant to help support the company during this transitional period. 

Key person insurance is not meant to be used on all employees, but rather just one to two. For example, a small business may want to take out a life insurance policy on the owner. The purpose of key person insurance is to protect the company from risks in the following ways:

1. Profits

Insurance can help offset the loss of sales and income.

1. Others Listed on Loans

Insurance coverage can match the amount owed on business loans.

1. Shareholders or Partners

Insurance can allow other stakeholders the opportunity to purchase the deceased’s company financial interests like stocks.

Key Employee Life Insurance

The coverage amount on a key person’s life insurance policy can vary depending on the size of the company and how big of a role the employee plays in the business. Companies can get coverage from as little or as much as you want — but keep in mind that you’ll want to get quotes to understand how much the premium cost will be. 

Additional factors like term versus permanent life insurance will play into the cost. Term life insurance is usually cheaper and may be wiser if you’re not sure the employee will stay forever. Similar to when you take out a personal life insurance policy, the individual’s health and age will also be considered when calculating the cost of coverage.

If you’re looking for tax-deductible options for your business, key employee life insurance is not a solution. Premium payments are not a tax-deductible business expense since the business is the listed beneficiary and can later collect income on the policy. Before taking out a life insurance policy on an employee, meet with a tax professional to understand the tax implications that can occur while paying the policy and in the event the policy is paid out.

Key Employee Disability Insurance

Similar to key employee life insurance, key employee disability insurance can be issued to protect the company in the event the insured person is hurt or ill and unable to perform their job duties. Like a company-backed life insurance policy, the company is the one to take out the policy, pay the premiums and is the listed beneficiary on the policy.

Disability insurance can be complicated and there’s typically a waiting period (30 to 180 days) before the policy is paid out. Your business may receive benefits for a certain period (6 to 18 months) while the employee either heals or during the time it takes the company to find a replacement. 

Why Is Key Employee Insurance Important?

If you know your business would suffer in the event the owner or executive were to be ill or deceased, it’s probably a good idea to discuss key employee insurance with them. Whether your business is big or small — the loss of income or a growing pile of bills can be devastating. Key employee insurance is vital to helping businesses stay afloat, keeping shareholders whole and protecting the business and guarantors on business loans from financial disaster. 

We’re Here to Help

You face many challenges as a business owner. Farm Bureau Financial Services understands how hard you’ve worked to build your business, and we want to help you protect it from the uncertainties that life brings. Learn how our business succession planning and small business insurance can help ensure the success of your company!