Key man insurance is not a sexist policy providing only for the male population of a company. It is a term that refers to any employee, partner, or owner who makes a significant contribution to a business. The intent is to provide financial assistance to a business suffering loss after a key employee dies.

Key man life insurance is an excellent employee benefit if the company pays for the policy using tax-free money. The premiums are not tax-deductible as a business expense. The employee’s family does receive the money without having to pay any income tax.

What are the benefits of key man business insurance? Keep reading for information about this unique type of policy.

1. Why You Need Key Man Insurance

Many businesses, especially those that are small or medium in size, heavily rely on one or two significant people. Not only can the loss of that person affect employee morale, but it will also cause a significant financial impact. Key employees include the owner, business partners, and key executives.

A study found that following a founding entrepreneur’s death approximately 60% of a business's sales are lost. The death of a key employee drops the business survival rate by 20% for two years following the loss.

When determining whether you need key employee insurance, consider the impact the loss of a particular employee would have on your company’s success.

2. Who Is a Key Person?

There are no specific rules for who a business considers a key person. It is an owner or employee that provides a direct contribution to the company’s bottom line. They may also be a key man in their operations.

People to consider when purchasing a key man insurance policy include:

• Engineers
• Difficult to replace personnel
• Heads of product development
• Leading sales personnel
• C-suite executives such as a CEO or COO
• Partners or co-owners of a firm

You may want to write down the names of your employees, what they do, and how their loss would impact the company. This review will provide information on who you need to purchase key man insurance policies for.

3. Types of Life Insurance

Any life insurance policy may be structured for use as a key man insurance policy.

Term life insurance provides coverage for a specific period of time, usually between 10-40 years. The premiums are less costly and usually have a term tied to the anticipated date of retirement.

Permanent or whole life policies provide coverage for the lifetime of the insured. A portion of the premiums is deposited into a cash-value account. The cash value increases over time and is an asset and may be used as collateral for a loan.

Permanent life insurance may pay dividends, which the business will receive. Because this type of policy accumulates value, it may be sold in a payout if the business determines coverage is no longer necessary.

Because of the cost difference, key man insurance is usually term insurance. Whichever form of insurance you purchase, the company needs to periodically conduct an insurance review. The review determines whether the company needs to increase or decrease the amount of coverage on each key employee.

4. Key Man Life Insurance Tax Treatment

Key man insurance is paid using after-tax dollars and is not tax-deductible. The only exception may be if the employee’s taxable income increases because of the insurance. To determine tax liability or benefit it is best to speak with your company accountant.

The death benefit of a key man insurance policy is generally paid without income tax liability upon the person’s death. The exception to this is with C corporations.

If you are a C corporation the death benefit will need to be included in your alternative minimum tax (AMT) calculation. You will need to show information about the key man coverage in your corporate tax return every year. This includes the number of insured employees, the amount of each person’s coverage, and if the employee gave permission for the policy’s purchase.

5. Tax Treatment for Employees

There will be no tax implications for the employee who is insured if the company is the sole owner and beneficiary. If you transfer the key man insurance policy ownership to the employee, they may have a tax liability. At the point of transfer, the insurance may be considered compensation by the IRS.

6. How Much Key Man Insurance Coverage Is Necessary?

The amount of coverage you need on each key person in your company will be dependent upon the impact that person’s loss would have on the company. To reach this determination, you need to consider the revenue and profit you can attribute to that employee. This includes the cost structure of the company, any “soft” value the employee has to the company, and the cost to replace the key person.

The most common methods for calculating a person’s coverage are:

1. Multiple compensation—multiply the employee’s compensation by the number of years the company estimates it will take to recover from their death
2. Percentage of revenue or profits—multiply revenue or profit the employee generates by the number of years it may take to replace them
3. Cost to replace—a total of the costs to replace the key employee include locating, hiring, and training the replacement, plus the loss of income during this process

The face value of policies usually has a limit based on the insured person’s income, if they have ownership in the business, and the corporate structure of the business.

7. Key Man Life Insurance

The difference between key man term insurance and standard life insurance is the reason for the coverage. A standard life insurance policy provides personal coverage. If the insured dies, their family receives cash benefits.

A key man insurance policy is for business purposes. It provides coverage for key personnel who are crucial to company operations. In the event the insured person dies, the business will receive an infusion of cash critical to their survival.

The funds compensate for the loss of revenue the business incurs following their key employee’s death. The company may also use the funds to pay off company debt and pay the costs of new employee training.

A key benefit is the company’s ability to pay the employee’s family for the deceased person’s interest in the business. This allows the business to maintain control over its key employees while providing financial security to the deceased person’s family.

When purchasing a policy you may want to review the various succession planning options available to businesses. This may include whether to purchase you also need to consider additional options such as buy-sell agreement insurance.

8. Key Man Disability Insurance

This is a policy that provides funding to a business if one of its key employees becomes unable to work due to a disability. A standard disability insurance policy provides the employee with loss of their wages and payment for medical expenses.

A key man disability policy will cover the business for their loss of revenue, the cost to hire a new employee, and more. The cost for this insurance will be dependent upon the age of the employee, their overall health, and their role within the business.

Consideration includes activities the person participates in when not working. This can include activities such as flying their own airplane, mountain climbing, motorcycle racing, or other high-risk activities that increase premiums.

9. Limitations of Key Man Insurance

Keyman insurance provides financial security for a company only in the event a key employee dies. It does not cover the loss of a key person who decides to leave your company due to retirement or to take a job with another company.

You are not able to purchase this type of insurance for employees who are not crucial to your business operations and ability to generate revenue. You cannot purchase key man insurance for independent contractors or other non-employees your business uses in its day-to-day operations.

10. Key Man Insurance Policy Cost

Your insurance agent will pull out their key man insurance calculator and go to work to provide the most cost-effective policy available. Your key man insurance policy premiums will be based on a variety of factors:

• Term insurance is lower in price than permanent life insurance
• Term insurance has a set period of coverage and does not accumulate any cash value
• Permanent life insurance policies are higher in price, but provide additional benefits
• The higher the death benefit, the higher the cost of the policy
• Employee’s overall health, including their age, medical history, and family health history
• Employee’s lifestyle, including hobbies, occupation, and driving record

Employees that are older or have health issues will be more costly to insure. You may want to look at all the business options Hummel Group offers. This includes commercial insurance, employee health plans, financial services, and business succession planning.

Financial Security for Your Business

Business owners tend to consider their loss if an executive becomes the subject of a lawsuit and purchase coverage for that type of liability. They tend to overlook the risk if one of the key players suddenly dies, leaving the company struggling to survive. Key man insurance is just one of many insurance options your business needs to consider.

When creating or reviewing your operating procedures and budget contact Hummel Group. We provide a wide range of business services to meet the needs of your business. You may call us toll-free at 800-860-1060 or use our online form to get a quote.

There are more than seven million small businesses in the United States. Whether a grocery store, construction, farm, or other industry they have one common factor. Every business has the ability to be wiped out of business out by a lawsuit or disaster.

When you are in business, one of the first things you need to purchase is commercial insurance. When working with a company like Hummel Group, you will be able to obtain all the coverage you need.

We offer insurance for trucking, logging, construction, manufacturing, farming, or more. We have specialized policies to fit your industry.

If you own a business, keep reading for more information. Proper insurance can keep your business afloat following a disaster.

Types of Insurance for Businesses

Every business needs minimal coverage to meet its basic needs and legal obligations. If you have an operating business, you may want to schedule an insurance review. During the review, your insurance agent will let you know of any recommended adjustments to your coverage.

If you are starting a business, meet with an insurance provider to learn about your options. Your insurance advisor will be able to guide you on what insurance plans provide the best security for your business. Basic insurance needs may include some or all of the following:

Workers’ Compensation

Every employer is required to carry workers' compensation coverage in accordance with your state's requirements. This insurance covers medical expenses and wage loss for employees who suffer injuries on the job. It may also provide coverage if the employee sues your company for their injury.

Disability Insurance

This insurance is mandatory only in the states of California, Hawaii, New Jersey, New York, Rhode Island, and Puerto Rico. It is optional in all other states. The insurance provides coverage for employees who are unable to work, even for a non-work-related injury

Liability Insurance

The company receives protection in the event someone files a lawsuit against the business. Coverage is available for products, employment practices, and professional liability.

Property Insurance

Property insurance covers your company's inventory, inventory, equipment, and buildings in the event of theft or damage. It may also cover loss of income if you are unable to conduct business due to a claim. Protection is for accidents such as fire, wind damage, or if a building collapses under the weight of snow.

Commercial Auto Insurance

This type of insurance is necessary if your company uses company vehicles to conduct business. This includes transporting inventory, equipment, or employees.

Cyber Liability Insurance

Protection against internet risks is crucial if your company relies on electronic files to conduct your business. The protection is for cyber-attacks and security breaches

Errors and Omissions

No matter how careful you conduct your business, from time to time you will have an unhappy client. This insurance provides protection against client claims of negligence or inadequate work.

Tax Deductions

The IRS allows a business to deduct their insurance premiums as an expense. To receive this deduction when filing taxes the policy must be “ordinary and necessary.” Consult your accountant to learn about acceptable business deductions

In addition to the basic insurance needs, some industries require specialty policies. These special policies provide coverage for areas that are unique to their particular industry.

Insurance for Trucking

There are currently about 15.5 million trucks operating in the United States. Two million of those are tractor-trailers. More than 500,000 trucks are in accidents every year and 68% of those happen in rural areas.

Those statistics show the need for commercial truck insurance. Even a simple "fender bender" can result in thousands of dollars in damage. In a collision with a passenger vehicle, those passengers are likely to suffer severe injury or death.

The impact of an accident may financially bankrupt your business without insurance coverage. Like your personal auto policy, commercial truck insurance covers a broad band of coverage. This includes collision, comprehensive, and liability.

The difference is trucks need coverage amounts that account for the heavier and more costly vehicle. They also need insurance for the value of the cargo they haul.

When purchasing a policy, make sure your purchase meets the federal and state requirements for commercial truck coverage. If your business has trucks operating across state lines, you need to comply with federal law. The government minimum insurance amounts may vary from your state requirements.

Coverage requirements are set forth in Title 49 §387 of the Code of Federal Regulations. They are based on the truck weight and cargo. Heavier trucks and dangerous cargo have higher insurance requirements.

Categories of Trucking Insurance

Most businesses needing truck insurance fall into one of the following categories:

• Motor Carrier—for-hire trucking companies with a fleet of vehicles are responsible for insuring their fleet
• Owner-Operator—an individual that owns and operates their own commercial truck as a business and purchases their own truck insurance
• Private Carrier—people who use their personal automobiles to transport merchandise for their employer and may either purchase their own insurance or receive insurance compensation from their employer

Commercial truck insurance may be purchased by all of the above. One policy may cover a single vehicle or an entire fleet of trucks. When selecting a policy you need to understand policy objectives.

The coverage portion of your policy lists the expenses, incidents, and damages the policy will cover. The monthly premium is the amount the business must pay every month to keep the insurance active.

If you file a claim the deductible is the amount of money the business will need to pay toward the repair. The insurance policy will pay the difference. The policy limit is the maximum amount of claims the insurance will pay.

Claims are usually only paid when the vehicle involved is listed on the policy. The driver operating the truck must be listed on the policy, and the incident must take place while conducting business.

Insurance for Loggers

The logging industry faces a unique group of risks. This includes sabotage from those who oppose the cutting of forests.

This labor-intense operation using high-powered equipment increases the risk to equipment and workers. Once out of the forest there are problems that may arise at the storage facility or during shipment.

Coverage needs will vary depending on the way you conduct operations. You may need to consider insurance for premises liability, fire, and nuisance hazards against equipment and wood. There is also the risk of environmental impairment exposure.

Businesses using helicopters to move logs from harvesting to loading have additional risks. There are additional insurance considerations when this is part of your business operation.

The logging industry incurred 655 fatal accidents between 2006-2015. During that same time period, 8,380 loggers incurred non-fatal injuries and illnesses.

You need to make sure you have sufficient insurance for workers in addition to standard logging insurance coverage. In addition to operating heavy equipment and power tools, workers are subject to environmental concerns. This includes falling trees, insects, snakes, animals, and exposure to weather conditions.

Insurance for Farmers

When you operate a ranch or farm for business, you need insurance that provides coverage in all areas of this industry. Depending on the operations of your business you may find yourself needing coverage for some or all of the following:

• Confinement operations
• Pollution liability
• Mixing feed
• Suffocation
• Custom spraying
• Hauling or storing grain for neighbors
• Equipment breakdown
• Trucking and transportation
• Processing, packing, or selling agricultural and food products
• Pumpkin patches, hayrides, and other agritourism and agritainment activities
• Livestock
• Buildings insured to value
• Peak season
• Business interruption
• On-farm retail stores
• Specialized insurance program for dairy, grain, fruit & vegetable, livestock, hog, poultry, aquaculture

You may also need special insurance if your farm or ranch participates in truck and tractor pulling competitions.

The farming and ranching industry is always at risk from destruction by storms or natural disasters. This includes loss of crops, destruction of fields and buildings by fire, insect infestation, drought, and more.

In 2020 there were 58,000 crop-insurance policyholders who had a liability of about $6 billion dollars in loss. The cause of this loss was a storm with hurricane-force winds that hit 57 counties in the state of Iowa. During the storm damage was done to 5.6 million acres of soybeans and 8.2 million acres of corn.

Because of the storm damage, the crops on the ground were susceptible to disease. Harvesting was difficult because the corn was bent. Combines were only able to run in one direction, and there was a risk of hidden storm debris in the fields damaging the combines or other equipment.

Insurance for Construction

When you own a construction business, you need to consider all the areas of business that put you at risk of loss. The type of insurance you need may change with each construction project. Determining factors include your relationship to the project. This means whether you are the property owner, contractor, subcontractor, etc.

Depending on your position in the project, insurance considerations include:

• Builder's Risk Insurance—coverage for buildings and other instructions under construction
• Commercial and Contractor General Liability—coverage for bodily harm or property damage
• Commercial Auto/Truck Insurance—for all vehicles used in the business
• Inland Marine Insurance—coverage for tools and equipment used by contractors and developers
• Contractor License Bond—guarantees compliance with regulations
• Construction Bond—guarantee certain aspects of a construction project
• Workmans' Compensation—required in all businesses

Construction insurance policies are sold independently. Every policy varies in coverage and cost as necessary for that project.

Consideration factors include the business credit history and contractor experience. Other factors are the size of the project and its location. Each project will have different coverage limits and deductibles.

Get an Industry Targeted Insurance Quote Today

Whether you need insurance for trucking, farming, logging, or any other type of business, Hummel Group can fill insurance needs. We offer customized risk management plans in a variety of niche markets.

Call us toll-free today at 800-860-1060 to obtain an insurance review and coverage recommendation. You may also request an online quote. Don’t risk an unexpected loss destroying the financial stability of your business. Call today!