Executive life insurance is something that is also called key man insurance. Basically what it means is that your business is insuring itself against the financial loss that could be impacted by losing someone of vital importance to the company.

Depending on the person that you lost not only could you stand to suffer severe financial strain to the company’s profits but it’s also not unrealistic for an early loss of someone to have to close their doors completely. Statistically it’s the smaller business that will use the executive or key man insurance more but there are a lot of larger businesses that will use it too.

Disability Difference

The key man insurance is completely different from disability insurance on the key man employee. The life insurance policy covers against a permanent and irrevocable loss of that employee from their participation in the business.

The insurance policy pays the death benefit to the company, who is also responsible for the premium payments. The money can be used for anything from paying off creditors to making it feasible to hire a successor and even setup a buy/sell arrangement to buyout the deceased persons stock/stake in the company.

Misconception

There is a misconception that some people have that a key man has to be the owner, founder, CEO of a company but that’s not the case even though it’s usually the case.

The point is though that it doesn’t have to be that way. An executive doesn’t have to be the only one for the policy as it can be a top salesperson that is your key man and the loss of that person would put a serious dent into the company’s profits. Also you’re not limited to one key man, with any business it’s likely that you’re going to have more than one person that’s vital to your business.

Deciding to Purchase

The question that might be going through your mind is when is the right time to purchase an executive or key man life insurance policy for one or more of your employees.

If the employee, or executive you’re thinking you should purchase a policy for has ongoing activities within the business that play a vital role with the company’s viability then it’s time to think about purchasing a policy for that person or people. Also it’s important to note if the employee you’re purchasing a life insurance policy on is under the age of 65 you should also have a disability insurance plan as well. Statistically speaking they are much more likely to become disabled then to die untimely; however, you should be covered from both bases. If you purchase these policies dual you’ll not only have a more comprehensive insurance plan but you’ll likely be saving on premium as well.

Purchase Amount

The only other thing to think about is the amount of insurance that you need to purchase for the key man in your company. It’s going to be dependent on both the size and debt state of affairs of the business. Usually companies will carry the policy with a face value of 2-3x the annual salary of the employee but there are a lot of policies that are written as far as 15x the annual salary.

You really need to take into account their total impact on the business and purchase your policy amount accordingly.