insurance

Keyman Insurance

Another term for key person insurance, this is a life insurance policy purchased by a business on a crucial employee whose death would cause significant financial loss to the company. The business owns the policy, pays premiums, and receives the death benefit to help cover lost profits and transition costs.

Example

“The advertising agency purchased keyman insurance on their creative director because losing his client relationships and industry expertise would devastate the company's revenue.”

Memory Tip

KEYMAN = Keep Everyone's Money Available Now - the insurance keeps money available when a key person is gone.

Why It Matters

Keyman insurance provides essential financial protection for businesses that depend heavily on specific individuals for revenue generation or operations. It can mean the difference between a company surviving the loss of a crucial employee and going out of business during the difficult transition period.

Common Misconception

Many business owners think keyman insurance is only necessary for owners or CEOs, but any employee whose loss would significantly impact revenue should be considered. Some also believe the coverage amount should equal the person's salary, when it should actually reflect the financial impact of their loss, which could be much higher.

In Practice

A dental practice generates $800,000 annually, with the lead dentist personally responsible for $500,000 of that revenue. They purchase $750,000 in keyman insurance with $8,000 annual premiums. When the dentist dies suddenly, the practice receives the death benefit and uses $200,000 to recruit a replacement, $300,000 to cover lost revenue during the 8-month transition, and $250,000 to reassure the bank and maintain operations until the new dentist builds patient relationships.

Etymology

Originally called "key man insurance" in the early 1900s, the term has evolved to the more gender-neutral "key person insurance," though "keyman" is still commonly used in the insurance industry.

Common Misspellings

Key Man InsuranceKeymans InsuranceKeymen InsuranceKeeman Insurance

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