Insurance is something that gives peace of mind and provides protection in the event the unforeseen happens. That’s why ensuring that keyman insurance (also known as key person insurance) is an important part of a construction company’s corporate policy.

What Is Keyman Insurance?

Keyman insurance can almost be viewed as a life insurance policy for the company’s business’ leaders. Essentially it provides life insurance for a partner, founder or key employee whom the success of the business depends upon. In a small business, this key employee is likely the owner or founder of the company.

How Does Keyman Insurance Work?

With a policy like this, a company purchases life insurance policies for one or more key employees, again, without whom, the business would suffer or possibly event shut its doors. Should these key employees die, the business is the policy beneficiary. This policy helps the company continue running successfully even after losing a crucial member of the team.

How Is the Policy Payout Used?

The insurance company can fund from the policy to help pay any expenses until a proper replacement is found. Debts or other monetary distributions can be paid off with these monies as well. Payroll obligations and/or employee severances can also be paid with these proceeds. Keyman insurance helps give extra peace of mind to business leaders in the event of a tragedy. It also helps to prevent chaos if the company must still close its doors. It will not however, cover any personal/familial obligations—this is where a personal life insurance policy would be advantageous.

Covered Losses

Covered losses vary between policies:

• losses related to when a key person cannot work but hasn’t died;
• profit protection; and
• protections of shareholders or partnership interests. Some keyman insurance policies enable shareholders or partnership interests to be purchased by existing shareholders or partners.

Who Needs Keyman Insurance?

Before defining who needs keyman insurance, know that keyman insurance isn’t necessary if a business entity has just a single employee with no other people who depend on the revenue.

For a very small business, the business owner is likely the only person who needs this kind of coverage. After all, this person conducts most of the business’ operations and makes nearly all strategic decisions. Without him or her, the business would likely fail to exist.

How Much Insurance Is Necessary?

The general rule according to insurance experts is to purchase as much as the company can afford. Several agents should be consulted and whether term, whole or variable policy is best, depending on the business’s specific needs. A good practice is always to price out various premiums and compare quotes. Think of how much money the company would need to survive if it lost one of its key officers. Investopedia suggests asking for the following quotes: $100,000, $250,000, $500,000, $750,000 and $1 million, depending on the business and industry.

Bottom Line

Take a close look at the business. Would it suffer tremendously without one or more of its key employees? Would the rest of the team be in jeopardy and possibly face unemployment in the event of the untimely death of a key executive? If the answer is yes to these questions, it’s likely that keyman insurance would greatly benefit the company and give business leaders the security of knowing the company and its employees are protected and allow the company to focus on continued success.