Business insurance is an important component of any entrepreneurial venture — and that’s true whether you’re a one-man show or a company with dozens of employees.
Still, there are different types of business insurance to consider, which may be crucial depending on the way your company operates.
One type of coverage, key man insurance, is important for any business with essential employees who are key to the functionality of that company.
Simply put, key man insurance is a type of business insurance that protects your company in the event you lose a key individual to disability or death.
Before you run out to buy a policy, keep reading to learn more about how this coverage works, how to determine whether you need it, and how much it costs.
How Does Key Man Insurance Work?
Key man insurance is crucial if you have essential employees you would struggle to operate without, but how does it work?
Typically, these policies involve a company purchasing life insurance combined with disability to cover “key employees.”
This coverage is intended to protect the company that buys it against financial losses arising from having to find and train a new employee who has the skills and abilities to replace the key worker who was lost.
Typically, key man insurance is offered as part of a broader business insurance policy covering a corporation or company from multiple threats.
In other words, key man insurance is rarely bought on its own as a separate policy; instead, it is usually purchased as part of a full business insurance policy.
How Can You Tell if You Need Key Man Insurance?
While key man insurance is purchased to cover an individual or several individuals, the business itself pays for it.
That’s because the policy is meant to pay out to the business if they lose the “key man,” unlike consumer-facing life and disability insurance products which would reimburse the individual who became disabled (or deceased) or their family.
But, how do you know if you need key man insurance?
At the end of the day, it’s up to you to decide if your business has key workers you would struggle to get by without.
Here are some signs that show you likely need to purchase this important coverage:
- You have at least one key employee who brings in a large percentage of your company’s revenue
- Your company employs several key workers who have unique knowledge about how your business operates
- Employees in your firm or business play an integral role in your company’s day-to-day operations
- You employ workers whose role is so important you cannot imagine your business functioning without them
What Does Key Man Insurance Cover?
The key to buying the right key man insurance policy for your needs is shopping around to find the best insurance quotes available and reading through your policy to find out what is covered.
On the flip side, you’ll also want to make sure you know what is not covered by your key man insurance policy.
So, what is covered?
Typically, any situation which leaves key employees deceased or unable to work due to a disability or injury would be covered under your policy.
Obviously, this would include a situation where your key worker had a heart attack and passed away, but it would also include debilitating injuries like loss of limbs, paralysis, stroke, and other ailments that could leave a worker disabled and unable to work.
In terms of what isn’t covered in a key man insurance policy, usually only fraud or misrepresentation would make your policy invalid.
If you know your key employee has cancer and will pass away soon, for example, buying a key man insurance policy is not the best way to prepare for this loss since your policy will not count.
Keep in mind that, like other life insurance and disability products, your key employee is required to fill out an application and complete an exam to qualify.
Their health and physical state will be evaluated during this time, and any physical ailments or conditions they have will need to be included on the application for coverage.
How Much Does Key Man Insurance Cost?
If you’re a business who needs key man insurance, it’s important to note this coverage isn’t overly expensive to buy.
Typically, you’ll pay somewhere between $100 to a few thousand dollars per year to add this coverage to your business insurance policy, although your rates can vary widely on several factors.
Factors that can impact key man insurance rates include:
- The age and health of your key employees — It will cost a lot more to provide key man insurance for a worker who is 70 versus someone in their 20s, for example. Workers in poor health may come with more costly key insurance premiums as well.
- Compensation for key employees — How much your employees earn also plays a role in your key man insurance quotes. The more your employees earn for their knowledge and expertise, the more coverage you’ll typically want to buy.
- The industry you work in — You may pay more for key man insurance if you operate in an industry with a high possibility of injury or death. Likewise, industries with lower levels of workplace risk may get away with paying lower premiums.
- The length of your policy — Like other life and disability insurance products, key man insurance is typically sold by the term. This means you can buy coverage for a certain amount of years — usually ten, fifteen, or twenty. The longer you want coverage, the more you’ll pay over the course of your policy.
- How much coverage you purchase — How much coverage you need will also play a role in your key man insurance premiums. If you have highly compensated key employees who would be very expensive to replace, you’ll need to purchase a larger policy that will ultimately cost you more money.
- Personal lifestyle habits such as smoking — If your key employees have unhealthy or risky habits such as smoking, you will probably pay a lot more for key man insurance.
How to Find a Key Man Insurance Policy
If you’re already shopping for business insurance, it’s likely you’ll be offered a certain level of key man insurance as part of a broader policy package.
If you already have insurance for your business but don’t have coverage specifically intended to cover the loss of key employees, you can also inquire with your insurance provider on the costs of adding this to your policy.
If you need to shop for key man insurance specifically, on the other hand, your best bet is shopping around for key man insurance and other business insurance products online.
By getting online business insurance quotes, you can easily compare insurance providers and prices from the comfort of your own home — and without the pressure of dealing with an insurance agent.
The time to get your business covered is now, and key man insurance is only part of the puzzle.
Make sure you take the steps to get covered including not only your business and professional liability, but also the loss of crucial employees.
The longer you wait, the more likely you’ll need this coverage after it’s too late.