Is Keyman Insurance the Same As Life Insurance?

Some businesses have tasks that can be run by many people, and when the CEO or the key people involved are no longer able to complete their tasks, someone else can easily take over. However, certain kinds of companies rely heavily on one or two staff. This increases the risks because the business can’t continue if the key people get injured, pass away, or can’t be involved anymore for another reason. In such a situation, buying keyman insurance is key.

But what exactly is key person insurance, and how does it differ from other policies like life insurance? If you’re the key employee and you’re insured by your company, do you still need to get life insurance to protect your family, or will the key person protection pay them, as well? Today, we’ll discuss what you should do if your business relies on one person and how you can make sure you’re protected, both professionally and personally.

What Is the Difference Between Keyman Insurance and Life Insurance? 

The main difference between key person insurance and life insurance is that the former covers a business, while the latter is designed for private people. You need key person protection if your company relies on one or two people and you’d lose a lot of revenue if these people were unable to work due to an illness, a sudden death, or a mental health issue.

A good policy will either pay a lump sum or an ongoing payment to replace the key person’s contribution to the firm. In contrast, life insurance is a policy designed for an individual who has one or more dependents. If you’re the main breadwinner in your household, you should consider getting a life insurance policy, which will pay your spouse, children, or other dependents in case you pass away unexpectedly.

Who Needs Life Insurance? 

You only need to get life insurance if there are others who rely on your income. Most people who have children should take out a policy, especially if the kids are still underage or if they need money to attend university. You should also consider getting a policy if your spouse would find it difficult to pay the mortgage without your income or if you are supporting another family member, such as a sibling or a parent.

If you’re one of the most important men or women in your company and the CEO has taken out key person protection for you, you might wonder whether you need to get a separate life insurance policy. In most cases, the answer is “yes” because the money from key person insurance usually goes to the business, not your family or relatives. To make sure everyone is well protected, you should speak to a qualified insurance agent.

What Types of Businesses Need Key Person Protection? 

Not all companies need to get key person insurance. In some cases, an employee or CEO can be replaced by someone else, and the business can keep running as before. However, the people are often a firm’s greatest assets, and you should consider taking out a policy if some members of the company have unique skills that are hard to find. This could be a very specific craft, a special soft skill, or in-depth knowledge about the business in question.

For example, you’ll need key person protection if the business is based around someone’s personality or image. This includes companies that sell the products or services of a guru or an expert. If this person is injured or passes away, they will no longer be able to provide customers with their service, and the company’s revenue might collapse. Getting a lump sum or a regular payment can help you keep the business afloat while you find a new strategy.

How Much Does Key Person Protection Cost? 

The cost of keyman insurance depends on the type of business you run, the amount of value the key person brings, and the duration of the payments. To get your quotes, you will first need to work out how much protection you need. Then, you have to decide what kinds of benefits you would like. Do you want a one-off lump sum paid out to you, or would you prefer regular payments for several years?

You should also keep in mind that, in some cases, key person insurance is tax deductible, so you will save some money on taxes. Since every situation is different, you should speak to an insurance advisor to find out whether you can deduct your insurance cost from your taxes.

Determining How Much Protection You Need 

Countless businesses need key person insurance, but the amount they take out varies greatly. There are several methods of calculating how much insurance you need, but the easiest way is to figure out how much revenue the key person produces and then multiply it by two. Your insurance agent can discuss your company’s individual needs with you and help you figure out whether this standard calculation applies to your situation.

What Is the Person’s Revenue-Producing Value?

The simplest way to determine how much insurance you need to buy is to calculate how much value the key person provides. To do this, have a look at your annual profits and ask yourself how much this person contributed. Then, you should think about how long it would take for you to recover from losing this person and get the business back on track.

In many cases, the formula “gross annual revenue x the key person’s contribution x 2” works well. Here, the key person’s contribution is calculated as a percentage. So, if your revenue is $1 million and the key person contributed 20%, the calculation is 1,000,000 x 0.2 x 2, which amounts to $400,000. This should be enough to get your company back on track if the person is no longer able to contribute.

What Is the Person’s Non-Revenue-Producing Value?

While the formula explained above works well for many people, not all contributions can be calculated as a monetary value. Some people don’t add revenue to your company, but they are still essential because they keep track of everyone else, help your employees do their best work, have a lot of information about your company, or handle the paperwork for you.

If your key person is non-revenue-producing, you have to estimate how much the loss of this employee would cost your company and then use a similar calculation as above. Since it can be hard to quantify someone’s value, you should speak to your insurance agent, who can tell you how other businesses in your industry handle this issue.

How Difficult Is It to Replace the Person? 

Finally, you need to consider how difficult it will be to replace your key people. The formula we’ve used so far is based on the assumption that you will be able to get your company back on track within two years of the key person’s injury or passing, but this might not be accurate.

If you believe that you wouldn’t find a replacement during this time, you might need to get more insurance. On the other hand, if you think you can find another employee within a year, you might be able to cut your insurance costs in half.

What Other Types of Insurance Does Your Business Need?

Key person insurance isn’t the only type of policy you need to take out as a business owner. In fact, there are several other kinds of insurance that might be even more important for your business. Liability insurance is key for any company that interacts with other people, and workers’ compensation is required if a firm has employees. Let’s have a look at some of the other policies you might need to take out.

Liability Insurance

Because we live in a highly litigious society, it’s easy for people to file a lawsuit against small and medium-sized businesses. If a customer injures themselves or their property gets damaged while they are on your premises, they might sue you for damages. This can be extremely expensive, especially if the injured party has high medical bills or is unable to go back to work. To protect your company, you should take out a good liability insurance policy.

Workers’ Compensation Insurance 

Most CEOs try to be fair to their employees and create good working conditions, but mistakes can happen to anyone. If you discriminate against an applicant or worker, put your employees at risk, or don’t respect your workers’ rights, you might face an expensive lawsuit. Workers’ compensation protects you against this. The policy pays for the compensation your employees receive as well as the legal fees associated with your case.

Life insurance protects your dependents when you pass away, so it’s designed for individuals. In contrast, keyman insurance is suitable for businesses that rely heavily on one or two people. This could be a revenue-producing employee, for example, a highly skilled worker, or it could be a non-revenue-producing person, like a leader or HR officer. Call us at ISU Armac to speak to our agents about key person protection. We’ll be happy to provide you with quotes.