Key Man Insurance and Buy Sell Agreement Life insurance Explained

Taking insurance cover is an essential aspect of any business operation.  The insurance sector is filled with a wide array of insurance covers designed to cater to various business needs. That said, an entrepreneur should have adequate knowledge, of which cover is ideal for his or her business.

For the success of any business, an entrepreneur must always reduce reliance on one particular employee. If not, taking insurance cover to provide some level of protection against shocks that might come into being because of personnel changes is crucial.  If the success of any business is dependent on one particular employee an entrepreneur must explore how the business would proceed should the employee leave the business unexpectedly.  

Taking cover to shield a business from shocks that may arise from crucial personnel is a smart decision that any entrepreneur should consider.  Such covers could target personnel that device growth strategies as well as those involved in critical decision-making.

Key Man is the type of insurance cover that businesses take to protect themselves from losses that may occur on losing a vital driver of the business.

What is Key Man Insurance?

Key Man insurance is a type of insurance cover that an entrepreneur takes on a key person in the business.  In general, it is an insurance policy taken to protect a business from any losses, arising from the death or incapacitation of an important person in the business.  In most cases, it is a standard life insurance policy for business succession or business protection purposes.

A key man policy does not extend beyond the period when a ‘key man’ is useful to a business.  The fact that businesses own such policies guarantees that all the payoffs go towards the business and not the person insured.  While the policy does not reimburse for all the actual losses incurred, it does compensate a fixed monetary sum.

In a small business structure, the cover may be taken against the owner or founders as they are the people crucial the prosperity of the business. In a big company or business, the cover may target many people mostly those in high management levels.

How Key Man Insurance Works

A key man Insurance works by a company or a business purchasing a life insurance policy on an employee/s. The business will in this case pay premiums and would remain the beneficiary of the policy and not the employee/s.

In case the personnel covered by the Key Man insurance cover dies, the insurance company is mandated to pay the company or business the agreed sum amount.

When to Get A Key Man Insurance

The best time to get key man insurance is when a business is heavily reliant on a given employee. An entrepreneur must consider the short-term implication of losing such a crucial employee.  A business that employee’s less than ten people should consider taking key man insurance right away.

Large businesses should also consider taking such policies right away if they have a group of individuals that they cannot do without.

Insurable Losses in a Key Man Insurance

A business may pursue Key Man insurance to shield itself against losses that may come into being on a key person being unable to work for an extended period. Any payoff that comes into being, as a result, may go towards financing the recruitment and training of a replacement.

Key man insurance could also come into being to protect profits. For instance, a business may take such a cover to offset any lost income because of delayed sales or cancellation of a vital business project.

A business may also take key man insurance to protect shareholders or any other partnership interests.  In this case, insurance would enable the purchase of shareholding of partnership interests by existing shareholders. The insurance may also be taken to shield against any person used to guarantee business loans or other banking facilities.

What Key Man Insurance Covers

Most insurance companies allow businesses to choose how they wish to spend payoffs from key man insurance policy covers and in return adjust the premiums accordingly.   While most businesses customize their policies to cover for recruitment fees as well as training costs, others use them for other purposes.

For instance, some businesses could configure their key man policies to cover for any costs that arise from paying for emergency cover awaiting permanent staff replacement.  Some payoffs go towards catering for any loss of profits that may arise as other goes towards meeting any ongoing loan payments.

Key man insurance payoff could also go towards replacing any lost revenue from the loss of a key person. Also, it could help finance a previously written transition plan.

Some businesses use the payoffs to cater for loss of important business contracts or contacts or catering for any difficulties that may arise for raising capital for new products.  In instances where businesses cannot operate without the key man, then any payoff would go towards winding down the business.

Benefits of Key Man Insurance

One of the reasons why Businesses take key insurance is to shield themselves from the headwinds that may come into being on losing a key person or employee.  A business can use a key man to cater for any expenses until it finds a worthy replacement.  Such payoffs can also go towards paying off debts or distributing money to investors.

Death or permanent incapacitation of a key man can affect a business credit line. In this case, a key man insurance policy would kick in and help guarantee loan repayments. Such policies also tend to boost the morale of the insured people, as they feel important and of value. The sense of belonging could go a long way in triggering high levels of productivity.

In public companies, key man insurance goes a long way in strengthening investors’ confidence.  Investors will avoid the temptation of offloading a company’s shares on the belief that the demise of any key person would be well offset on an insurance company making payments.

Key man Insurance protects the company’s valuation, which allows prospective buyers to put a higher value on a company by factoring in the cost of protecting key persons in the business.

While businesses do take Key Man insurance to help protect the financial viability of a business, a Buy-Sell Agreement also goes hand in hand with the insurance Cover.

What is a Buy-Sell Agreement?

A buy-sell agreement is a legally binding agreement that governs how a business or a company’s finances are utilized, should a key partner leave, die or become disabled.  Such agreements are synonymous with business partnership scenarios, where partners look to safeguard themselves while in partnership. Such agreements can also be set up between stakeholders in a business with an employee or employees group.

How to get buy-sell agreement life insurance

For a buy-sell agreement to serve its purpose, then business partners must fund the agreement accordingly. This process involves ensuring that the total amount of life insurance coverage taken is enough to cover for the value of share ownership.

The three methods of funding buy-sell agreement involve entity purchase, cross purchase, and Hybrid mode. In the case of an entity, purchase partners use the business itself to take a life insurance policy. In Return, the business acts as the owner and beneficiary of the policy.

In a cross-purchase agreement, each co-owner takes life insurance on the other co-owners. All the partners pay premiums leading to multiple policies. A hybrid mode, on the other hand, combines the attributes of the other two models.

How Buy-Sell Agreements Work

A Buy sell agreement would work well in a business owned by two partners. In this case, the partners would take a term life insurance policy that allows one partner to buy out business in case one partner dies leaves or is incapacitated.

Should one partner die, an insurance company would have to release the amount agreed in the policy, which most of the time reflects the actual value of a business at a given time.  Once received, the remaining partner would be able to use the insurance payoff to buy out the business, which could be from a next of kin as stipulated by the deceased partner.

The beneficiary of the buy-sell agreement is usually the partner and not the company or business, as is the case with key man policies. Besides, the value of a business must be estimated from time to time and premiums adjusted accordingly, to ensure final payments reflect the actual value of a business.

A buy-sell agreement taken by a business owner and employees would provide the staff, a way of owning the business on the demise of the owner. Once an insurance company makes payment on the death or incapacitation of the owner, the employees would be able to use the proceeds to buy the business altogether, this time from the next of keen as stipulated by the owner.

Buy Sell Agreement Purpose

A buy-sell agreement provides a clear path on how business would go on, on the demise of a key partner. Such policies benefit the deceased partner’s estate by relieving them the burden of having to run a business they have little knowledge of or interested in running. The cover also benefits the remaining partners by relieving them the burden of being in business with people they do not wish to collaborate in running the business.

Buy-sell agreements also allow for an orderly transfer of ownership interests in the event one partner dies or leaves the business altogether.  The fact that the agreement describes the terms under which ownership is transferable ensures there are no management wrangles in case one partner exits.

A Buy sell agreement fixes the market value of a business, which allows surviving partners to buy out any stakes with ease when one partner dies.  The fact that the policy also obligates surviving partners to buy shares of the deceased partner also eliminates any conflicts that may arise.

Difference Between Key Man Insurance and Buy-Sell Agreement

Key Man insurance policies are taken on both employees as well as executives. The policy shields the company from any financial expenditure that may come into being in case of death or incapacitation to an owner or key personnel.

Buy sell agreement, on the other hand, is synonymous with co-owners or partners. The legally binding agreement allows remaining partners to buy off all the stakes of their other co-partner in case of death or incapacitation.

Key Man Insurance policies try to address day-to-day operations of businesses concerning important and crucial personnel. Buy-sell Agreements, on the other hand, try to address ownership structure in the event of one or multiple owners passing away.


When starting a business, it is crucial to have a plan for protecting the investment as well as business parts in case of a partnership. It is also important to factor in what would happen in case of death or incapacitation and what role the family would play.

A Key Man Policy is an important insurance policy that helps protect businesses from the loss of essential personnel.  A Buy sell agreement, on the other hand, goes a long way in protecting the interest of any remaining partners in the event of death afflicting one of the partners.

Key man insurance and buy-sell agreement policies are therefore vital as they allow businesses to continue operating, full mode, in the event of the worst scenario to a key employee or partner.  Given the potential impact of death on a key person or partner, it is essential for a business to take both policies while still in the early stages of development.

If you’re looking for either, give us a call today or run quote using our online quoter on this page.