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What is the difference between key man insurance and life insurance?


Insurance protects your business, family, and personal welfare in case something bad happens. And most would agree that the worst thing that could happen is losing a life. Having insurance that can protect your employees, their families, and your business during these unfortunate times can be a little solace in a tragic situation and lessen the damage the event has done to everyone. increase.

As a business owner, you have choices when it comes to purchasing life insurance. You can give every employee a policy, but there’s more you can do. But should I have keyman insurance or life insurance?

key person insurance, formerly known as keyman insurance (a snap for the insurance industry’s awakening), is a special type of insurance that can be purchased for selected individuals. Analyze the differences between traditional life insurance and this particular type of coverage. Let’s start with the kind you likely already know something about:

What is life insurance?

Standard life insurance is offered by virtually all employers. Life insurance is a contract between an individual and an insurance company. When an employer provides life insurance, it is considered an employee benefit. Because buying in bulk may result in lower premiums as opposed to buying as a single entity.

In the event of death, the insurance company pays the beneficiary a lump sum known as a lump sum death benefit. There are two main types of life insurance.

  1. Term insurance: This type of life insurance provides coverage for a specific period of time (usually 10 to 40 years). This period is usually associated with the expected retirement date.
  2. Whole Life Insurance or Whole Life Insurance: Permanent insurance provides coverage for the life of the insured and accumulates value as a portion of the premium is credited over time to a cash value account.

What is the coverage of life insurance?

Life insurance typically covers most causes of death, including natural death, accident, homicide, and suicide, and in the event of death, the policy pays directly to the beneficiary. They can spend the money however they like, but common uses include:

  • Inheritance tax and funeral costs
  • cover basic living expenses
  • Payment of household debt
  • make up for lost income
  • children’s education fund
  • Retirement savings supplement

What is not covered by life insurance?

In some circumstances, life insurance withholds payments to beneficiaries. Reasons include:

  • Life insurance contract expired
  • Fraudulent or criminal activity committed on behalf of the policyholder
  • Policyholder deaths included risky behavior such as participating in extreme sports

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What is key person insurance?

It’s actually somewhat similar to life insurance. This is insurance that pays out when an employee dies. Key person insurance is paid to the business because it is the policyholder in this case. This is a type of company owned life insurance (COLI). However, sometimes both businesses and families get paid.

Simply put, a company owns the insurance, pays the premium, and is the beneficiary. Key person insurance is life insurance that companies take out for their most valuable employees or employees.

Employees must provide consent. In addition to death coverage, an insurance policy can also include a disability rider. If the key person dies, the business collects the death benefit. The purpose of this type of insurance is to protect your business in the event of the loss of an irreplaceable person to your business through death.

What is the coverage of key person insurance?

Key person insurance can be used by businesses to recover after the loss of key contributors. This individual is directly tied to the company’s overall success, so the funds can be used to:

  • Increase recruitment of qualified and competitive candidates to fill vacant roles
  • Make up for lost sales, productivity, and operational disruption costs
  • Help fund rebranding efforts if the individual had a consumer-facing role
  • provide money to the family of the deceased

What does Key Person Insurance not cover?

These policies do not cover contractors or freelancers, payments are made only in the event of the person’s death, and they do not fund in the event of retirement or termination.

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What does a key person look like?

A key person is an irreplaceable employee. In some cases, the business he may be the owner, especially if the business or brand is named after the person. Policies can also be applied to executives and niche product developers. A key person can also be someone who holds a highly specialized role, or who excels in their field and is profitable with their extraordinary ability.

How much is the cost of living and key person insurance?

While insurance plan costs take into account certain factors, insurance companies typically base group life insurance premiums on the overall risk of the company or group. Term insurance is usually cheaper than whole or whole life insurance. Generally, the higher the death benefit, the higher the premium.

with regard to the determination Key person premium, the cost also varies from base to base, but to get an idea of ​​the spending, add the person’s direct financial contribution to the company’s revenue for the year, plus the person’s salary, and multiply the result by 5. Insurers also consider additional factors such as: the time and effort it takes to find and hire a successor, the cost of hiring, the cost of operational disruption, lost productivity, and lost sales.

Should Your Business Have Keyman Insurance and Life Insurance?

Another reason you might be interested in key person insurance, other than the assurance that your company will not suffer significant financial loss at the same time as loss of life, is applying for a business loan or other financing. In such cases, the lender or investor may require a key person policy as collateral.

Ultimately, however, when deciding between the two types of insurance, you may end up choosing both. As mentioned earlier, key person insurance does not cover all employees. Group life insurance is a type of individual life insurance that employers can offer to all employees at a low cost and is available to the entire company.

Check out Embroker’s to find the right policies for your business Digital insurance platform.



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