Key Man Insurance: Cost, Coverage & Providers
Nathan Weller is an Insurance Expert focusing on insurance for small business. He has 15 years experience in insurance operations, FNOL, and claims handling.
Key man insurance, or key person insurance, is life insurance coverage a business takes out for an individual employee who is crucial to the financial success of the company. The business purchases the policy, pays the premiums, and is the beneficiary in the case of the death or disablement of the key person. A 20-year term policy for $3 million costs an average of $178 monthly.
However, it’s essential with key man insurance to make sure the policy provides coverage for your business needs.
Did You Know?
A study of nearly 1,500 entrepreneur deaths found that when a key person dies, sales decrease on average by 60%. As a business owner, you purchase insurance to protect your structure against fire. You should also consider purchasing a policy that will provide for the company if a key person dies.
Key Man Insurance Providers
Because key person insurance is a specialty life insurance policy, options are available from many different carriers. After surveying the field and looking at what they offer, here are the top providers with the best options for key person insurance.
- Nationwide Insurance: Best for businesses looking for a plan to pay benefits and accumulate savings
- State Farm: Best for businesses that prefer working with an agent
- Key Person Insurance: Best for businesses looking for instant quotes
- Founder Shield: Best for venture-backed startup businesses
- Simply Insurance: Best for businesses that don’t want to have to speak with an agent
- Petersen International Underwriters: Best for businesses with difficulty obtaining key person insurance
Nationwide
Nationwide Insurance has an AM Best rating of A+ (Superior) and with nearly 100 years of experience in writing insurance, Nationwide is a carrier you can trust. It offers business succession plans for companies. Under that offering, you’ll find its key person insurance policy, which it calls Corporate Owned Life Insurance. Its policy also offers a cash value that may be available to the company as a withdrawal or loan if needed.
Nationwide is best for a business looking for an established carrier with the option of taking a loan on the key person insurance policy.
State Farm
State Farm is one of the largest domestic insurance companies in the United States. In 2021, State Farm was the top-ranked Life Insurance provider by J.D. Power. It also received top marks in customer service. State Farm is known for utilizing agents to gain and retain customers.
State Farm is best for a business that values customer service and prefers working directly with an agent.
Key Person Insurance
Key Person Insurance as its name implies, it’s a specialty brokerage focusing on key person insurance specifically for small businesses. Founded in 2004, the brokerage offers fast, instant quotes online. It states that its quote system is updated three times weekly to ensure you get the most accurate quote.
Key Person Insurance is best if you have a small business and are looking for multiple quotes.
Founder Shield
Founder Shield is a recent startup broker focusing on leveraging technology to make the insurance experience less stressful and more streamlined. Its emphasis is on the corporate world and, specifically, venture-backed companies.
If you have a small, venture-backed business, consider looking into Founder Shield for your key person insurance.
Simply Insurance
Simply Insurance was started by two life insurance agents who discovered most people didn’t want to talk to an agent. Simply Insurance is a life insurance brokerage. On its website, you can obtain a quote and coverage for key person insurance without speaking to an agent.
This broker is best for businesses looking for quick, no-hassle coverage.
Petersen International Underwriters
Petersen International Underwriters through a partnership with Lloyds of London, Petersen has access to the global marketplace to find the right policy for you. It offers key person insurance when many other companies won’t. For example, it offers key person insurance for individuals as old as 75.
If your business has trouble finding a company willing to sell you key person insurance, you should check out Petersen International.
Typical Yearly Key Person Insurance Cost
Age | 20-year term | $500,000 | 25-year term | $500,000 | 30-year term | $500,000 |
|---|---|---|---|---|---|---|
Male | Female | Male | Female | Male | Female | |
30 | $224 | $194 | $298 | $250 | $354 | $298 |
40 | $344 | $287 | $508 | $398 | $602 | $474 |
50 | $842 | $654 | $934 | $934 | $1516 | $1141 |
How Much Key Man Coverage Do You Need?
Unless you’re getting key man insurance as a requirement for a loan, the coverage amount is up to you. There are several approaches to calculating how much coverage your business needs:
- Multiply compensation: Multiply the person’s compensation by the years the company estimates it’ll take to recover from their death. Their compensation is the total compensation: salary, benefits, pay bonuses, stock options, and anything else the employee receives or may receive related to their role and performance.
- Revenue: For this method, you’ll want to multiply the employee’s generated revenue by the years you estimate it’ll take to replace them. If the key person is a top salesperson for the company, this may be the best route for your business.
- Replacement cost: Calculate the total cost to replace the key person. This cost includes recruiting and training and the compensation needed to draw an employee of the same caliber. This number should also factor in any lost revenue the company may experience during this transition time.
Key Person Insurance & How it Works
Key person insurance is a life insurance policy that a business purchases for a key person: an owner, founder or top executive, or another person who’s critical to the business. Unlike a standard life insurance policy where the beneficiary is another individual, the company is the beneficiary of the policy and pays the premiums.
The money from the policy can be used to recruit and train a replacement. Alternatively, should the business determine that it cannot continue operations, the benefit can be used to help the transition into properly closing the business.
A general rule of thumb is that premiums for key person insurance aren’t tax-deductible.
Types of Key Person Insurance
Because this is a life insurance policy, there are only a few different options:
- Term life: This provides coverage for a certain period, usually between 10 to 40 years. Premiums are less costly for this type of coverage.
- Permanent life: Also called Whole Life, this provides coverage for the insured’s lifetime. Permanent life may pay dividends to the business. If the company determines that the policy is no longer necessary to have it, the policy may be sold in a payout.
- Variable life: This policy is similar to permanent life. The main difference is the premiums are paid into an investment account instead of a savings account and can gain or lose value depending upon market conditions.
Does Your Business Need Key Person Insurance?
These questions can guide you in determining if this policy is suitable for your business needs:
- Is your company’s reputation tied to one person’s name?
- Is your company’s brand directly related to an employee?
- Do the majority of your company sales come from one salesperson?
- Does your company have a particular person whose ideas shape the company’s products?
- Is there a person in your company whose death would cause significant financial harm to the company?
- Would the loss of an employee negatively impact the company’s credit?
If the answer is yes to any of the above questions, you should consider key person insurance.
Additionally, some lenders will mandate key person insurance before providing financing. There are some situations where the lender is a beneficiary of the key person’s insurance. After whatever outstanding debt is paid, the remaining benefit will go to the business.
Key person insurance typically will come with what’s called a “contestability” period. During this time, the insurance company has the right to investigate the claim to see if the business made any fraudulent statements and, depending upon the investigations, may deny the claim.
Bottom Line
You purchase insurance for your company to protect it from a loss, especially a catastrophic one. Have you considered its impact on your business if a key person were to pass away suddenly? While key person insurance is another cost for your business, protecting your company’s brand may be worth it in the long run.
