Mountain Insurance Broker’s insurance agents routinely get asked “what’s the difference between key man insurance and life insurance?” It is an important question and deserves attention.
Basically, they operate generally along the same lines, but there are major differentiations. Both policies get paid for by the policy owner on a monthly basis. Both life insurance policies provide death benefits that act to dispense a specific financial payout in the event of a death. The difference between key man life insurance and regular life insurance is the architecture of the policy.
A personal life insurance policy acts to cover the insured individual and provides the death benefit to a spouse or children to personal expenses. Usually the policy owner and the insured individual is the same person. The death benefits can bel small just to cover the final expenses of a funeral, or it can be structured to maintain the standard of living for surviving beneficiaries for a certain amount of time. Personal life insurance policies can be designed to act as an investment or to act as a protection policy; both act to protect the security of the beneficiary which is primarily the family.
Regarding key man life insurance, the key person is the one who is insured and the company owns and pays the premiums on the policy, and the largest difference is that the company is the beneficiary. In the event of the key person’s death, the death benefit payout goes to the company and not the key employee’s spouse or children. Key man life insurance policies act to inject liquid funds into the business to protect against a variety of financial losses. A company will have to scout out, hire, train and retain a new replacement employee. This is costly and the death benefit covers the expense of these burdens. The policy also provides a legal transition plan for stakeholders on how the company will continue to operate, and the policy will cover the expenses incurred during the transition. Key man insurance policies may be written to include benefits to buy out stakeholders as well. Key man life insurance protects the security of the business.