Checklist - Key Employee Life Insurance

In many a companies there is at least one person that is so valuable that you may wonder what the company would do if he or she were not there. As a business owner it may be wise to buy a key employee (key man) life insurance policy on that employee. It has been suggested that the face amount of the policy should be the equivalent 5 years of the amount of revenue this employee generates.

The business typically owns the policy, pays the premiums, and is the beneficiary. Most businesses purchase key-person insurance as a permanent life insurance policy; however, term life insurance may be less expensive and can be bought to cover the key person until he or she retires. The policy can be then transferred to the departing employee as a retirement benefit or to a different key person, upon the retirement of the original key person.

Key-person insurance benefits are often used to buy out the insured person's shares or interest in the company. Buy-sell agreements, which require the deceased executive's estate to sell its stock to the remaining shareholders, legally facilitate this process. Proceeds from key-person insurance can also be used to recruit replacement management.

The following form contains some critical questions you should ask your agent or broker when considering this type of insurance.