A Quick Reference to Everything You Need to Know About Keyman Insurance
Here is a list of our most frequently asked questions about key man insurance, how it works, and who we are. Read through them all to get a better understanding of how we can help, or use the quick navigation below to find the answer to your specific question.
Key Man Life Insurance Basics
Question: What is key man insurance?
Key man insurance is business-based life or disability insurance that provides immediate cash to a company in the event a “key man” – such as an owner, high-level executive, or top salesperson – dies or is disabled unexpectedly. Unlike traditional insurance that is purchased by the insured person and they name their own beneficiary (typically a family member), key man insurance is purchased by the business and the business will be the beneficiary of the insurance payout in the event of the key person’s death. This offers assurance to owners and investors that the company will have the cash to continue operations without interruption if a key person is lost. Payouts are usually tax-free and can be used for any purpose. The most common uses include replacement costs to acquire a new employee or to provide the cash flow needed to keep the business going during the transitional time immediately after the key employee’s death while contingency plans are developed.
Question: How does key man life insurance work?
Key man life insurance policies protect a business, not an employee. A company makes an application for life insurance on a specific owner or critical employee (the “insured”). The business is the owner of the policy, pays the premium, and is the beneficiary in the event the key person dies. Companies will then typically use the funds to recruit a qualified replacement or to cover short term revenue deficits.
Question: Does my business need key person insurance?
If your business would suffer dramatically if one of your key employees died or became disabled, your company needs key man insurance protection. Most small businesses need this valuable coverage as they often depend heavily on one or two people. Other reasons companies may need key man insurance include the need to secure a business loan (often key man insurance is a requirement of approval), provide funding for a family buy-out in the event of the death of a business partner, complete business succession planning, and fund executive benefits.
Question: What is the difference between key man insurance and term life insurance?
Traditional life insurance and key man life insurance are almost identical. Both will pay a beneficiary a predetermined amount of money in the event of the death of the insured person. In both cases, there is a policy owner who pays the premiums and names the beneficiary. In a traditional life insurance policy, the insured owns the policy, pays the premiums, and names their own beneficiary (usually a family member). A key man life insurance policy is owned and paid for by the business, and the company is usually the beneficiary. It is a financial protection for the ongoing operations of the business, not protection for the employee’s family (as is typically the case in traditional life insurance).
Types, Coverage Amounts, and Cost
Question: How much key man insurance do I need?
It is difficult to quantify the financial value of an employee as there are many contributing factors. Of the multiple methods available to determine a valuation, the most common is the “multiples of income” approach. This is calculated by multiplying the employee’s salary (including benefits) with a multiplier – generally 5-7 times. So if a person’s annual income is $200,000, a reasonable amount of coverage would be $1,000,000 to $1,400,000.
Of course, there are additional factors to consider including that employee’s direct contribution to company revenue or the amount of time it would take to find and train a replacement. Working with an expert in the unique niche of key man life insurance will help you determine what amount of insurance is right for your specific company.
Question: What type of key man insurance should I buy?
Several different types of life and disability insurance are used in key person coverage, and the right policy will ultimately depend upon the amount of time you anticipate needing coverage. By far, level term life insurance is the most widely used key life policy. However, in long term situations like planning for business continuation or executive benefits planning, whole life insurance, indexed life, or universal life policies can be more appropriate.
Question: How much does a key person life insurance policy cost?
Prices vary based on age, health, policy type, and the amount of coverage. See our sample 10-year level term rate chart to get a rough idea of what a basic policy will cost, or let us give you an instant quote based on your specific circumstances right now!
Exam and Non-Exam Options
Question: Is an insurance exam required?
In most cases, yes, an exam is required. However, more and more insurance companies, in limited situations, are now offering key man life insurance with no medical exam. For policies requiring an exam, it’s a mistake to automatically assume you will or will not qualify for insurance based on perceived health or risks. In fact, it is a regular occurrence for competing companies to approve coverage at different health classes when evaluating the same information. Therefore, it is essential to work with a professional agent who understands the underwriting process and has relationships with multiple companies to help you find the best policy given your specific health class and circumstances.
For more details on the insurance exam requirements, see Everything you need to know about A Paramedical Exam. The insurance exam is one of the most crucial steps in obtaining a keyman insurance policy and has a significant impact on your actual rate. For best results, review “how to get the best results on your insurance exam.”
Question: What if I do not want to do an exam?
As mentioned above, there are now several options to secure key man insurance with no medical exam. These policies are desirable in situations like securing a loan when coverage is needed quickly to close a deal. The underwriting time can be significantly shorter if the insured is in excellent health. However, there are limitations to non-medical policies, and they are not likely the best solution unless you are under the age of 60 and in excellent health.
Concerned You’re Uninsurable?
Question: What if I have a health problem or a severe medical condition?
A current or past medical condition may significantly impact your rates. Depending upon the state of your health, “advertised rates” may not be available, but there is likely an excellent chance that you can obtain an affordably-priced policy. The key will be to identify the insurance provider that looks most favorably on your condition or offers a limited policy with the exclusion of the specific health factor. This requires working with an agent with significant underwriting experience. If you have a medical problem or are unsure about whether a past health issue is a factor, it is essential to disclose this history to an insurance professional. Full disclosure is the only way to guarantee the best results.
Question: I was declined coverage previously. What are my options?
If you have previously applied for key man life insurance and been denied, it doesn’t necessarily mean that you are uninsurable with all companies. There are more than 80 competitive insurance companies in this marketplace, and each has its own set of criteria for assessing risk. In other words, while one company may view a specific medical condition as automatic grounds for denial, another may not consider it as high-risk to insure. After shopping for coverage, if you are ultimately uninsurable with all key man companies, there still may be an option. A Failure to Survive (FTS) policy is a last resort when all other options have been exhausted FTS is specialty “death protection,” very similar to life insurance, that is available with an exclusion for a specific medical condition that would otherwise render you uninsurable. While more expensive, there are many situations where a key man policy is crucial to obtaining financing, attracting an ideal investor, or just plain protecting the business. In these cases, an FTS policy can be a great solution.
Length of Application Process
Question: How long does it take to get a policy?
The length of time required to get a policy approved will depend on the type of policy and the health of the insured. Policies requiring an exam can be approved and issued in as little as two weeks. However, if there is ANY medical condition, even well-controlled blood pressure, medical reports are usually required which will lengthen the underwriting process. In these cases, it may take up to 6 weeks to get a policy approved. When purchasing a no-exam policy, approvals can be made instantly or in as little as two days. However, this is the exception to the norm and only applies to very healthy individuals. As a general rule, you can expect the underwriting approval process to take anywhere from 4-6 weeks with most companies.
Exclusions and Cancellation
Question: Are there any exclusions of coverage?
During the first two years of every life insurance policy, there is a contractual clause known as the contestability period. The contestability clause protects the insurance company from fraudulent and misleading statements made by applicants for insurance in an attempt to secure coverage at a better health class. In the event of a claim within the first two policy years, all insurance companies will investigate for fraud, the omission of facts, and deceptive statements made on the original application and insurance exam. An indication of intentional dishonesty can result in the denial of the claim. It is the burden of the insurance company to prove that an applicant for insurance lied or committed fraud during the application process. The contestability period also includes a suicide provision. The suicide clause states that death claims made on suicides within the first two policy years will be automatically denied. If suicide occurs after the first two years, the claim gets paid. Generally speaking, fraud, misrepresentation, or suicide within the first two years are the only policy exclusions with key man life insurance contracts. Policy language varies among companies, so read your policy carefully. Disability insurance differs widely from life insurance in terms of exclusions.
Question: Can the insurance company cancel my policy without my permission?
No! All life insurance policies are unilateral contracts meaning they cannot be canceled by anyone other than the insured individual or the policy owner. As long as the business pays the required premium, the coverage will remain in effect.
Question: If I no longer need the policy for my business, can I transfer the coverage to a personal plan?
Yes. As a business owner, you can transfer the ownership of a business owned life insurance policy to you personally without penalty. The IRS covers this under the “Transfer for Value” rule and exceptions. In general, it states a business owned policy can be transferred to the covered individual personally, and the death benefit remains non-taxable. We recommend that you consult your tax advisor for tax advice.
Question: Can I cancel a key person insurance policy if I no longer need it?
Yes! You may cancel coverage at any time by simply discontinuing premium payments. There is no penalty.
Question: What happens to a policy when the business is sold or no longer operating?
If a business changes hands, the new business owner now controls the policy. In most cases, if the insured remains with the company and that person is critical to the organization’s success, the coverage is maintained. In situations where the insured was a former business owner, the policy is transferable to a personal plan, or it can be terminated contingent upon the terms of the sale of the company. If a business policy is in effect and the business closes, plans are generally not going to be renewed and will lapse due to non-payment.
Business Reporting and Tax Implications
Question: Why does the insurance company need my company’s financial information?
Key man insurance underwriting is a bit more complicated than applying for an ordinary life insurance policy. The insurance company not only underwrites the insured’s health but also needs to justify the amount of insurance being purchased on the insured’s behalf. Reasonable requirements for financial disclosure to underwrite a key man insurance application are a listing of business assets, liabilities, and net worth along with sales, expenses, and net income for the two previous years. Only with this information can the insurance company determine whether or not the business needs the policy and at what level. If you are going to apply for key person life or disability insurance, be prepared to provide these necessary financial details.
Question: Is key man insurance tax deductible?
Premiums for key person life and disability insurance are not tax-deductible and are not considered a business expense. Tax-related questions for all business-owned life insurance policies are under IRS Code Section 1.264-1(a). The code states that premiums paid for life insurance on any officer, employee, or person financially interested in a business are not deductible where the company is directly or indirectly a beneficiary of the policy. Regardless of what you may read online at other websites, the IRS strictly prohibits the deduction of business-owned life insurance as an expense.
Question: Can I name my spouse as the beneficiary?
Yes, you can name your spouse as beneficiary or partial beneficiary of a life insurance policy. However, this is highly discouraged because structuring a business owned life insurance policy to include a personal beneficiary will cause tax implications. As a rule, always separate business and personal when it comes to life insurance. It doesn’t cost significantly more, and you can avoid potential tax pitfalls.
Question: Are there any reporting requirements for key man insurance policies?
As of August 2006, there are IRS reporting requirements for all business-owned life insurance policies purchased from that date forward. The COLI Best Practices Act (which is part of the Pension Protection Act of 2006), includes IRC Section 101(j). Under this law, life insurance death benefits of employer-owned life insurance policies issued after the effective date of August 17, 2006, are income taxable (to the extent the death benefit exceeds the employer’s premiums) unless specific requirements for an exception to taxation are met.
Question: Will taking out a business policy impact my ability to buy personal life or disability insurance?
One of the questions on every life or disability application asks the amount of insurance currently in effect. The chief reason is that insurance companies do not want to over-insure. However, they do differentiate between key man insurance for business purposes and individual life and disability income insurance. So, in nearly all situations, business-owned life and disability insurance do not affect the amount of personal coverage you can purchase.
Question: When am I required to send payments, and how do I pay?
Payment options are flexible. In many cases, you can submit the initial payment along with the application and “bind” the coverage as long as all of the terms of the “Conditional Receipt” are satisfied. The more common approach is to apply for the policy without any upfront payment and wait until the insurance company approves your plan before submitting money. This option is commonly referred to as cash on delivery or “COD.” If you choose not to send money until the policy is approved, no coverage will be in effect until the insurance company approves coverage and receives payment. Every insurance company allows for payment in one of 4 ways: annually, semi-annually, quarterly, or you may choose to pay by monthly bank draft. The cost of these options will vary. Depending on the insurance company, there may be an extra charge of 2-6% for any option other than annual.
Question: How can I make sure that I select a good insurance company?
Financial ratings for most insurance companies are available with one or more of the independent rating services. These services include AM Best, Standard & Poors, Fitch, and Weiss Ratings. Each of the independent rating services has its own criteria for ranking any life or disability insurance company. We strongly recommend using companies that have at least an “A” rating with AM Best but prefer “A+.”
Question: Can I buy a key person insurance policy directly from the insurance company?
There are a limited amount of companies that will allow you to purchase key man insurance directly. However, there is no advantage to buying directly from an insurance provider. Key man policy costs are NOT cheaper if purchased directly from an insurance company versus a professional insurance broker; prices are regulated by state insurance departments. The best way to guarantee the lowest price is to work with an expert broker who can compare your options from many different companies.
About Our Website
Question: What companies do you represent?
We represent over 80 of the country’s most competitive key man life and disability insurance companies. See the companies we represent.
Question: Who is MEG Financial, Inc.?
MEG Financial, Inc. is a Florida based corporation that provides life insurance and financial services consulting to individuals and businesses in all 50 states and the District of Columbia. We represent over 80 of the most respected life and disability insurance companies. Our primary areas of expertise include term life, universal life, and disability income insurance. We also specialize in business insurance, in-force policy review, insuring serious health issues, and estate planning.
MEG Financial is the founder and publisher of the website. At MEG, we provide free insurance quotes and advice to individuals and businesses all across the United States. Since the year 2000, we have successfully helped thousands of individuals and companies obtain life and disability insurance and have written well over $3 billion of life insurance. During this period, we have cultivated key relationships and developed specific expertise that allows us to get more value for our customers. At MEG Financial, our bottom line is results, and we are committed to every case to deliver the optimum policy that meets the diverse needs of each policyholder.
Question: How can I contact MEG?
Please visit our Contact Page and feel free to reach out to us with any questions or concerns. We will respond promptly.
Ready to Buy Key Man Insurance
Question: I’m interested. What’s the next step?
Give us a call or request a quote online! We’ll walk you through the process. In general, the steps are:
- Mini-physical (paid for by the insurance company)
The entire process can take 3-6 weeks depending on the type and terms of your policy. Get started today!