How does keyman insurance policy work?
What does key person insurance cover?
Who needs keyman insurance policy?
And where can one get the best key person insurance quote?
These questions above and more are some of the things we shall be covering in this article
If you have invested your time, money, energy and creativity to grow the business of your dream, the next heartbreaking fear you will have will be losing it all because a key man in your team passed on.
The keyman insurance is also known as key person insurance is the specific type of life insurance policy that shields a business from collapsing when a key member of the team dies.
Every forward-thinking startup founder must consider having this type of life insurance to help protect what he laboured for.
Before we go in detail to explain exactly how key man insurance works, let’s first and foremost look at what key person insurance means.
What is Keyman Insurance?
Keyman insurance policy provides cover for death when a key member of your company dies. The death benefits are paid to the business. It also pays out when any member of your team becomes critically ill or disabled in such a manner that they will no longer be able to work.
Keyman insurance can as well be referred to as the key person insurance coverage. By protecting your business against significant losses, you can help elongate the lifespan of your business.
That goes to show that one of the reasons why most businesses close down immediately the founder, one of the partners or employees dies is because they don’t have a working key person insurance policy to protect the business.
Imagine the impact it will have on your business should you lose your top developer, engineer or salesperson.
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How Does Keyman Insurance Policy Work?
Keyman insurance is a life insurance policy, paid by the business, that pays the death benefit to the company upon the death of the named individual. The business owns the policy. The key person in the policy must have agreed in writing before you can purchase key person insurance. The death benefit is paid to the business. It can be used to purchase back company shares owned by the deceased, pay company debt, or provide a financial cushion to cover financial losses.
Is Purchasing Keyman Insurance Really Important?
Yes, buying key person insurance policy is important especially if your business viability is based on the reputation, goodwill, name or skills of a specific member of the team.
Most small businesses will depend on the skills of one or two individuals to thrive. But if for any reason this person dies, it will be quite difficult for the business to continue. With the help of keyman insurance coverage, the death benefit paid to the business will be used to pay the most important staff and also for hiring a replacement.
How to Calculate Your Keyman Insurance Costs
There are basically 3 smart ways to calculate your ideal keyman insurance costs:
- Proportion of profits:
This is the key man’s salary divided by the total salary bill (in the last trading period) multiplied by profits (net or gross) times the number of years it would take to replace them. For example, $50,000 (key person’s salary) / $250,000 (total salary bill) x $400,000 (net profits) x 2 (no. of years to find replacement)= $160,000.
- Profits-based formula:
This would be the amount of net or gross profits the key person had a direct hand in multiplied by a common multiple, for example, $30,000 of gross profit x 2 = $60,000
- Salary-based formula:
This is the salary of a key man times a common multiple, for example, $40,000 x 5 = $200,000.
If you understand how to calculate your keyman insurance cost, you can always get an affordable key person insurance quote whether online or offline.
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To efficiently ascertain how much keyman insurance policy you will need, don’t depend on the key person insurance calculator alone, you will still need to reach out to a professional insurance agent near you to help you evaluate your business.