Key person insurance, otherwise known as key man insurance, is a type of umbrella insurance policy. Think of it as basic life insurance, only that fills a specific need in an organization. Without you, your business would not be the same; your company could not function without a leader, a mastermind, or even a handful of key employees. Without these key people, how would you perform all of your business functions? Your business would crumble without the heartbeat of a key person.
An individual who becomes a key person in an organization is often referred to as an executive, a director, or a vice president. In business terms, a key man insurance policy is called the key man policy. The primary purpose of this type of business insurance policy is to protect the assets of the business owner (the one who makes the decisions) in the event that person is no longer able to perform the duties of that position.
A key person insurance policy typically covers the owner, the director, or the secretary. However, the policies may also cover the partners, the business manager, or even the entire staff if they are all key members of the company. Many times, key person insurance policies are also called small business insurance. In most cases, the premiums associated with key person insurance policies are quite low because they are aimed specifically at protecting the assets of the business owner. Because these policies are less expensive, however, they are often offered in tandem with other types of small business insurance like liability insurance, worker’s compensation insurance, and business interruption insurance.
A key person insurance policy can also provide added benefits to the business owner and his or her family members. Some policies may offer workers’ compensation benefits to the employees, or may provide for alternative work schedules. Other optional benefits may include temporary disability benefits, which can cover missed days of work due to illness or injury. Finally, other types of key person insurance policies may pay the cost of lost wages, child care costs, or pain and suffering claims.
Another type of key person insurance policy covers an immediate family member of the employee, called a dependent. Unlike the policy covers that provide to an employee, this type of insurance does not need to be renewed each year. Instead, the insurance is for the life of the key person who is covered under the policy. This means that the dependents of the insured can receive the death benefit and the premium at the same time. The dependents may also be able to obtain the premiums at a reduced rate if they remain employed by the company for a certain period of time.
Another form of business insurance, death benefit, is designed to replace the cash value coverage of a policy. A policy typically provides coverage for the benefit of the named survivors in the case of the insured employee’s death. This type of insurance is considered an “abbreviated life insurance contract.” With an abbreviated contract, the death benefit is replaced with a lump sum amount. This occurs when the cash value coverage of a policy is replaced with life coverage.