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Key Man Insurance


Every successful company can attribute its success to the company's employees and management. Publicly traded companies insure their management; they value their key employees and understand that a premature death would have significant financial implications on their business. In 2012 the most valuable company in the world was Apple Computers the premature death of Steve Jobs left the company devastated.  In a smaller company the effect of a premature death of one of its key employees or shareholders would be even greater. Key man life insurance provides the necessary funds the company needs to cope with a tragic loss.

When a tragic event of a premature death of one of the company's key employees or shareholders occurs, the company is faced with the following problems:

    1. Replacing their key employee or shareholder and having the financial resources to pay for attracting an individual with the required qualifications and experience.

    2. The cost of training a new employee. 

    3. Reassuring creditors that the company is financially stable and can meet its future financial obligations.

    4. Reassuring existing employees that the company has the resources to operate as a going concern.

    5. The ability to service and maintain existing clients and pursue new business opportunities.

    6. A key man life insurance policy is often the deciding factor whether the company will succeed or fail. The money provided to the company during its vulnerable time is the lifeline to stay afloat.


Life insurance premiums are not tax deductible to the corporation. The Corporation owns the policy and is the beneficiary on the policy.


There are a number of approaches that can be utilized to place a value on a key person. 

The most common ways to value a key person are as follows:

    1. Contribution to the organization based on business earnings.

    2. Contribution based on the financial stability of the corporation.

    3. Cost to replace their key employee or shareholder by recruitment in the marketplace.

    4. Valuation based on compensation.

There is no set formula to determine the specific value of a key employee to an organization, each situation is different. From a life insurance standpoint, the basic rule of thumb commonly used is a range of anywhere from 3 to 5 times annual compensation of the key employee. From an underwriting standpoint the purpose of the life insurance is to cover a specific risk not to create wealth for the company.


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The information provided on this web site is intended for general information only. It should not be construed as legal, accounting, tax or specific insurance and investment advice. Clients should consult a professional advisor concerning their situations and any specific insurance and investment matters. While reasonable steps have been taken to ensure that this information was accurate as of the date hereof, Stone-Hedge Financial Group Inc. and its affiliates make no representation or warranty as to the accuracy of this information and assume no responsibility for reliance upon it.

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