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Everything you need to know about key person (or keyman) life insurance including how much insurance coverage, the type of coverage, who pays the premiums, and the type of life insurance to investigate.
Who?
Key person insurance is normally placed on owners and key employees.
Why (How much)?
The ‘why’ of key person life insurance is based on the potential loss should a key employee die. We simply total up the potential loss and we end up with the answer of ‘how much’ insurance we should be looking at. Doing so also uncovers the reasons we may consider investigating this type of coverage. Typical losses include:
- Direct lost sales until replacement is 100% trained.
- Lost accounts due to loss of relationship with client.
- Cost of hiring a replacement, i.e recruiting, advertising costs.
- Slow down in business
- Cost of training replacement
Simply take an estimate of each of these items, add in any other expenses or losses you are likely to incur and total them. This is your estimate of how much key person life insurance you should consider.
Type of Insurance
There are two general types of life insurance in Canada; term and permanent. If the intention is to keep the insurance until the key person retires or exits the business, then term life insurance is appropriate. If the intention is to offer the insurance to the key person when they exit the business (perhaps as a benefit), then permanent life insurance would be appropriate.
Structure
There are three parties to the insurance policy, the insured, the policy owner, and the beneficiary. The insured will of course be the key person. The corporation will normally be the beneficiary and the policy owner. This means the corporation would both own, control, and pay for the insurance policy. These premiums are not normally deductible.
Would you like a quote on life insurance? Simply call 1-877-344-4011 at your convenience or book a call with one of our life insurance specialists.
