To obtain the best coverage when purchasing a key person insurance policy, you should be mindful of common errors and misconceptions. The following details these common mistakes. Review these points carefully in order to select the ideal key man insurance policy for your company.

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1. Not Considering Key Man Disability Insurance

Many companies in the market for key man insurance erroneously only buy life insurance, thereby completely overlooking the need for disability insurance. It is imperative to consider the fact that, for most people, at most ages, the likelihood of a disability is significantly higher than the risk of death. Additionally, the financial impact of disability is just as severe, therefore key man disability insurance is equally critical as life insurance.


2. Not Understanding the Financial Justification Requirements

When buying key person insurance, businesses often do not realize that there must be financial justification to obtain the amount of insurance coverage desired. Policy coverage is only available where there is a realistic, inherent risk of loss to the company. Start-up companies with no revenue will be limited when insuring their key people, a fact that owners and investors alike must come to understand.


3. Underestimating Time Needed to Obtain a Policy

As with any solid insurance plan, the process of obtaining a key man life or disability insurance policy requires time. Allow for an average of four to six weeks for approval. Waiting to apply at the last minute will not give the insurance company enough time to evaluate the application and approve the policy. For more information on obtaining a policy refer to "The Process of Obtaining Key Man Life and Disability Insurance".


4. The Beneficiary Should Not be a Bank, Investor or Lending Institution

Naming a bank or lending institution as the beneficiary of a key man insurance policy is not a wise decision. In the event of a death or disability of a key person, any outstanding loans or notes due can be handled through a collateral assignment, which will pay off the amount due with the balance of the insurance policy funds being paid to the business. Collateral assignments ensure that the bank or lending institution will not receive more than the exact amount of money owed at the time of a key person's death or disability.

5. Withholding Important Health and Lifestyle Details

Disclosing accurate health, hobby, and other lifestyle information is imperative when applying for key person insurance. Top insurance companies operate within their own ìnichesî in order to remain competitive. By including all health and lifestyle information on the application, you will receive highly individualized service with the insurance company that will suit your needs. On the other hand, if such details are not disclosed up front, and are thereby revealed in the midst of the underwriting process, the result will be a higher priced policy. The time you invest in securing a key man insurance plan could be doubled as you reapply with another company for a lower rate.

6. Key Person Insurance Premiums are Not Tax Deductible

Funds received from key person life or disability insurance policies are received tax free in most cases. This means that policy premiums are not a business expense to be deducted.



7. Not Selecting a Knowledgeable Insurance Agent

To secure the best key man insurance plan for your company, be sure to choose an experienced independent agent. Yes, key man insurance is basically life and disability insurance, however there are significant variations in how insurance companies view these cases. You need a knowledgeable agent that understands your business and your needs.

Steer clear of these seven common mistakes and you can rest assured that your company is securing the proper key person insurance policy.

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