Life Insurance Blog

There are two types of life insurance a company can purchase to cover an employee. The first is standard cover on an annual basis, which is often provided as a perk for employees. The other is key man insurance, which is taken out by companies to insure an important employee’s role within the company.

Insurance provided as a perk is usually offered to the employee as part of a class of employees. It tends to be very cheap for a number of reasons. It’s usually purchased on an annual basis, which lowers the cost of the premiums as compared to insurance purchased over a longer term. These policies also tend to be standardised and there is little room to change the terms, making them less expensive but also less flexible than standard insurance policies purchased by individuals.

Insurance policies provided by an employer also may not have as generous a payout as the employee would want, meaning an additional policy may be required or desired. However, because of the lower cost, employees tend to benefit from a large employer’s ability to buy a large number of policies at once.

Key man insurance is quite different from this. Many smaller companies rely on three or four key individuals. They may be a particularly effective manger, a key engineer designing an important product, or a salesman or account manager who looks after a crucial client. If any of these employees dies, the company will be in financial trouble due to that loss.

However, that financial trouble may be mitigated by a replacement, although some time could be required to find one. Therefore, key man insurance covers these important employees and pays the company (not the employee’s family) in the event of his or her loss, providing the company a financial cushion until an appropriate replacement can be found. It is usual practice to inform the employee if key man insurance is in place and sometimes the company will sell this policy to the employee when he or she leaves the firm.