As a business owner, you may be advised that you need several different types of insurance. For one, your business will need workers’ compensation. Other types of insurance you may consider include property, liability, cyber, unemployment, health, life, auto, and key person insurance.
You may be looking for ways to reduce your business expenses without compromising your services and wonder if key man insurance is necessary. It’s essential to understand what key man insurance is and how it can benefit your business to determine if your company needs it.
What is key man insurance?
Key man insurance, also known as key person insurance, provides businesses with compensation if a critical employee dies or is unable to work for an extended period. For example, if a staff member with key man insurance is diagnosed with a serious illness or hospitalized following an accident, the key man insurance policy will pay a lump sum to the business to compensate for this person’s absence.
What is life insurance?
Life insurance pays death benefits to a person’s estate or beneficiaries when they die. You can compare life insurance with iSelect and use their life insurance calculator to determine the optimum amount of coverage required.
Businesses have a history of taking out life insurance policies on employees. The business pays the policy premiums, and the company is the beneficiary.
Business owners only receive benefits from a life insurance policy if the employee dies.
What is TPD insurance?
Total and permanent disability (TPD) insurance pays benefits when a person has a permanent disability. Insured persons will receive one lump sum payment of benefits if they qualify. They must establish that you are unable to continue working in your current field. For example, a plumber or electrician who loses the use of their hand would qualify for TPD insurance. A financial advisor who suffers a traumatic brain injury may also be eligible.
TPD insurance protects the person with a disability. The insurance company pays compensation to them directly.
What is income protection insurance?
Income protection policies pay benefits to individuals who are not able to work for some time. Individuals may be unable to work due to a short-term disability stemming from an accident or illness.
Income protection pays a percentage of your gross monthly income. It delivers this amount each month. The number of months you can receive income protection varies. Basic policies may only provide benefits for a few months. Premium policies pay benefits for years.
Income protection insurance pays benefits directly to the person who is unable to work. Beneficiaries will receive several monthly payments from income protection policies. Key man policies provide one payment.
What are the benefits of key man insurance?
Companies can suffer if a vital team member is unavailable. Critical employees may manage their clients. They may also have an established reputation that attracts clientele to your business. Your business may lose revenue if a key person is unable to return to work for an extended period.
Key person insurance benefits can compensate for the loss of revenue. The proceeds can finance hiring and training a replacement. Your business’s credit rating may also be affected by the loss of a critical employee, particularly if the insured person was a co-owner or leader in your industry. You can use the benefits to pay off debts or increase your company’s capital value.
It’s possible to take out a key man policy on an employee with a pre-existing condition, and the policy premiums are tax-deductible.
Key man policies pay benefits directly to employers. TPD and income protection plans do not provide financial compensation to the employer.
Key person coverage is more extensive than life insurance and provides compensation for a broader range of issues impacting a critical employee’s ability to work, such as illness or injury.
