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Key Man Insurance

"When hiring key employees, there are only two qualities to look for: judgement and taste." —John W. Gardner

Employees clapping.
Who are the people in your company applauding? That's how you pinpoint your key employee(s).

Can you imagine The Beatles without McCartney or Lennon? Microsoft without Bill Gates? Apple without Steve Jobs? Sometimes, one or two important people keep the heart, soul, and bottom line of a project or business alive.

But what happens if that person vanished forever...starting right now? If the thought sends you into a panic, that means you should consider key man insurance for the person or people you can't do without.

Key man insurance is purchased and held by a company. Each policy covers an individual who is absolutely essential to the running of the business. In a partnership, this might include both partners. In a small corporation, it might include a CEO, CFO, or a chief engineer. Some companies may need to insure their "thought leader," a marketing whiz, or a design superstar.

If that superstar dies unexpectedly, your company is the beneficiary of the life insurance policy. You can use that money to keep the business running, to help replace lost profits, to finance a search for a replacement, build a competitive salary package for your chosen candidate, and more. After all, it's hard to recapture the magic that your rockstar employee contributed. (Just ask Van Halen fans.)

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How does a key man policy benefit my business?

Owning a key man policy on one or more employees gives your business financial credibility. It shows you have a long-range business continuation strategy. If your company needs to seek out rounds of financing from angel investors or a private equity firm, for example, they're going to need to see evidence of this kind of long-range thinking. Here are some of the often-overlooked benefits to your business of owning such a policy:

  • The policy counts as a business asset
  • It assures banks and creditors that should the key employee pass away, your business will remain solvent
  • If you select a permanent life insurance policy with cash value, that cash value can be added to your balance sheet as a surplus
  • You can use cash value or the death benefit payout as collateral for future business loans

Can I use key man insurance as an employee incentive?

Yes. Key man insurance protects your business. But it can also protect the employee, much like an individual life insurance policy.

Because the business owns the policy, the business gets to decide how the death benefit is split up should that employee pass away. If you like, you can create a contract that stipulates a certain amount of that death benefit be given to the spouse or other heirs of the key man. This functions as a benefit for that employee—you can even write it into a key man's benefits package.

Because key employees are so important, savvy business owners know that a generous benefits package can really help with hiring and retention. Why not protect yourself and your superstar at the same time?

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How much coverage should I buy?

Key employee holding business card.
Key employees need training time, so make sure the policy covers your company for long enough to get through his or her probationary period.

That depends on your industry and on how much your star employee contributes to your profits. As a rough estimate, key person policies usually total between $100,000 and $1,000,000. There are two ways you can drill down from that wide range.

Method 1: Quick and Dirty
Buy 8-10 times the employee's salary. This is a quick-and-dirty way of arriving at a policy face value quickly. It might be overshooting or undershooting your needs, however, so if you have the time, it's a better idea to do a little homework using method 2, below. You can also use an industry-specific percentage for the amount of return key employees tend to provide:

  • Insurance: 9%
  • Agriculture: 17%
  • Arts & entertainment: 18%
  • Technical services: 18%
  • Education: 22%
  • Real estate: 25%
  • Health care: 26%

Method 2: Detailed and Accurate
Estimate how much that employee contributes to your sales. You want cover at least that amount, along with the burden of costs you'll shoulder while searching for and training your employee's replacement. Some business owners pad this estimate with a few months' more worth of costs, figuring that the replacement employee will need some training time to settle in and learn the ropes before he or she can contribute to your bottom line as strongly as your first key employee.

Review your key man's performance over the past year, asking these types of questions:

  • How much has she brought into the company in terms of billable hours or new clients?
  • What's the estimated yearly value of the products she's designed and brought to market?
  • Do other departments depend on her skills, expertise, and knowledge in order to fulfill their job duties? If so, add their profits or productivity into your estimate of her worth.

If you can figure out a monthly average contribution for your employee, multiply that by the number of months you expect the search for a replacement to take.

You may also want to compare prices. If your company is just starting out, for example, policy prices between a $100,000 and $250,000 policy might make a big difference to your bottom line. We can price out different policies for you and help you find the one that gives you protective coverage without breaking the bank. For a personalized consultation, give us a call at 800-823-4852. Or you can price out sample policies using our quick quoter—just click the orange button below.

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Copyright 2002-Present Pinney Wholesale Insurance Services - All Rights Reserved 2266 Lava Ridge Court, Roseville, CA 95661

*Comparison of each carrier’s best published rates for a
10-year level term policy, 30-year-old non-smoking female

^Represents 10-year level term life insurance rates for 40-year-old female,
in good health, no tobacco, residing in Ohio.

R. Jan Pinney CLU, ChFC is a licensed life insurance agent in all states and the District of Columbia. The following agent license numbers are provided for R. Jan Pinney as required by state law: CA agent #0440057, LA agent #291116, MA agent #1674866, MN agent #20270113, UT agent #58330, agent R. Jan Pinney, DBA Pinney Insurance Services. Commercial use by others is prohibited by law. This site provides term quotes. Each rate is a quote based on information provided by the carrier. No portion of Trusted Quote may be copied, published, faxed, mailed or distributed in any manner for any purpose without prior written authorization of the owner.

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