KEY MAN COVERAGE: SIZE IT TO THE CASH YOU WOULD NEED.
The company is the owner and the beneficiary of the policy, so the benefit goes to the company and not to the family. It is cash for the company to use while it replaces the person, pays its overhead and keeps bonded jobs moving. Life coverage pays on death. Disability coverage pays when the person meets the policy's definition of disabled and the waiting period has passed. A surety or a lender may ask about it, and what they ask for differs. The amount is sized to the cash the company would need, which for a contractor means overhead, payables that cannot wait, retainage that may be delayed and the cost of finishing bonded work. The premium is an overhead or owner cost and never a job cost.
Owners search for this as key man insurance, and many carriers and brokers call it key person insurance. It is the same coverage. This page explains what it does, why a surety or a lender may bring it up, how the premium and the benefit are booked, and how to size the amount with a worksheet. SPM does not sell or place coverage. A licensed broker does, and a tax professional decides the tax treatment.
WHAT IT MEANS.
Key man coverage, which many carriers call key person coverage, is life or disability insurance that a company buys on its owner or on another person the business depends on. The company owns the policy, pays the premium and receives the benefit if that person dies or becomes disabled.
The person insured does not have to be the owner. In a $1M to $12M subcontractor the person the company depends on is often the owner who prices the work, but it can also be the lead estimator who holds the numbers or the project manager who holds the relationship with a general contractor. A simple test works: if this person were gone for six months, what could the company not do? The coverage goes on that person, and the amount comes from what the loss would cost the company.
Who can be insured, how much a carrier will issue and how a disability is defined differ by carrier and by state, and the carrier looks at the person's health and income before it issues anything. Tax rules differ too. This page covers how the money works. A licensed broker places the coverage, and the owner checks the tax treatment with a tax professional.
WHAT THE COVERAGE DOES AND WHY IT COMES UP.
The company owns it, pays it and collects it
The policy belongs to the company, and the company pays the premium. If the insured person dies, the benefit is paid to the company. On a key person disability policy, the benefit is paid to the company once the person meets the policy's definition of disabled and the waiting period is over. Carrier materials describe benefits paid either monthly for a limited number of months or as a lump sum after a longer wait, and policies differ. The company is the beneficiary here and the family is not, so the owner's personal life and disability coverage is a separate decision.
Life and disability are two different risks
Death is one event. Disability can last months or years, and the loss comes slowly: bids go out late, general contractors stop getting calls back and the owner's relationships go cold. A life policy pays nothing when the owner is injured and out for a year. A disability policy has a waiting period before it pays anything, so the company needs cash in the bank to cover those weeks. The definition of disabled is written into each policy, and it is worth reading before the premium is paid.
Why a surety may ask
A surety is deciding whether the company can finish the bonded work it has. Surety agency materials describe underwriters asking who would finish the jobs if a leader died or left, and some say life insurance on key people can help underwriting, along with a successor identified in advance and a buy-sell agreement. There is no standard rule. Sureties differ, and the surety agent can say what a particular surety wants to see. The surety relationship page covers how the company shows it can finish its work.
Why a lender may ask
A bank is lending against the cash flow of a company that may depend on one person. SBA's rules for guaranteed loans have addressed life insurance on key principals when a loan is not fully secured and the business depends on one person, usually with the policy pledged to the lender through a collateral assignment. The rules change between editions of SBA's procedures, and banks outside SBA set their own terms. A collateral assignment gives the lender a claim on the benefit, so the cash that reaches the company can be less than the face amount. Read the loan documents and ask the broker how the assignment works.
How it supports a buy-sell agreement
A buy-sell agreement says who buys an owner's share if the owner dies, becomes disabled or leaves, and how the price is set. Insurance materials describe two common setups. In an entity purchase the company owns the policies and pays the buyout. In a cross-purchase the owners hold policies on each other. Disability buyout coverage can fund the agreement as well. A buy-sell with no funding is a promise to pay cash the company may not have. The buyout is one need and the operating cash in this worksheet is another, so sizing them as one number is how companies end up short on both.
What it does for the company's value
Buyers and appraisers treat dependence on one person as a risk to value. Appraisers may adjust the value for it, and how much depends on the case, so SPM does not print a percentage. Insurance pays cash if the person is lost, but it does not make the company less dependent on that person. What lowers the dependence is a second person who can price a bid, estimates tied to job cost, and a WIP schedule that lives in the books and not in the owner's head. The valuation page covers what a buyer looks at.
How the premium and the benefit are booked
The premium belongs in overhead or owner cost and stays out of job cost and the labor burden on field hours. SPM books it as an overhead or owner cost, the way the tax professional directs. On tax, IRS business expense guidance says a business generally cannot deduct life insurance premiums when the business is a beneficiary of the policy. Death benefits are generally not taxed as income, but the IRS has rules for employer-owned policies that call for written notice to the insured and written consent before the policy is issued, with annual reporting on Form 8925. How disability premiums and benefits are taxed depends on who owns the policy and who pays, and sources disagree. A death or disability benefit is not job revenue and stays out of WIP. The owner confirms all of this with a tax professional, because the rules and the facts differ.
WHAT IT LOOKS LIKE IN DOLLARS.
Example math with invented round inputs: $6M of revenue, $500,000 of billing a month and $70,000 of overhead a month. Line 1, overhead cushion: 3 months at $70,000 is $210,000. Line 2, payables due in the next 30 days that collections may not cover: $120,000. Line 3, retainage expected to release in the next 6 months that could be delayed if jobs finish late: $120,000. Line 4, interim help for the person's work, 6 months at $12,000 a month fully loaded: $72,000. Line 5, a bonded work cushion of 3 percent of the $2,000,000 left to bill on bonded jobs: $60,000. The 3 percent is invented for this example. A surety or a broker would set a real figure. The five lines total $582,000.
In the example, the owner counts $150,000 of cash the company already holds above what it needs to operate. $582,000 less $150,000 leaves $432,000 of cash need, and that is the figure to bring to a broker, who says what a carrier will issue for that person's age, health and income. Backlog sets the time frame. $4.5M of backlog at $500,000 of billing a month is 9 months of work, so the loss of the person reaches new awards when that work thins. The worksheet is redone whenever the WIP schedule is updated, because payables, retainage and backlog change every month.
SPM has no verified premium rate to print, so this uses an invented $9,000 a year. That is $750 a month, or 1.07 percent of the $70,000 of monthly overhead. Overhead of $840,000 on $6M of revenue is 14.0 percent. Add $9,000 and it is $849,000, or 14.15 percent. The premium is small next to a $432,000 cash need, and it still goes into the overhead rate so bids recover it.
WHAT WE CHANGE.
SPM pulls overhead, open payables, retainage and backlog from the books and the WIP schedule, then fills in the five lines with the owner. The owner chooses the transition period and the cash already set aside. SPM updates the worksheet when the WIP schedule updates, so the amount does not go stale.
SPM records the premium as an overhead or owner cost as the tax professional directs, keeps it out of job cost and the labor burden, and keeps any benefit out of job revenue. A simple record lists the insured person, the owner of the policy, the beneficiary, the amount, the premium date and any lender assignment. The true cost per employee page shows how a replacement person's pay and burden are priced.
SPM puts the WIP schedule and the cash worksheet in front of the surety agent and the banker, and asks each one in writing what it wants to see about the key people and succession. Requirements differ, so the answer comes from them and not from a rule of thumb.
Business overhead expense coverage comes up beside key man coverage. Sources describe it as disability coverage that reimburses a business's fixed overhead, such as rent, utilities, loan interest and non-owner employee pay, while the owner cannot work. It does not replace the owner's own pay, it has a waiting period and a limited benefit period, and the monthly benefit follows the business's expenses. A contractor asks which of its costs count as overhead under the policy. SPM gives the overhead budget to the broker so line 1 of the worksheet and that benefit are not both counted for the same dollars.
FLAT MONTHLY FEE. NO SURPRISES.
Three tiers, priced by your trailing twelve month revenue. Which one you're in depends on how much of the work you want off your desk. No hourly billing. No payroll. The one-time onboarding fee is right here in the table.
| Last 12 months revenue | Monthly fee | One-time onboarding |
|---|---|---|
| Up to $1M | $1,900 to $2,900 | $1,000 |
| $1M to $3.5M | $2,600 to $3,900 | $1,500 |
| $3.5M to $6.5M | $3,800 to $5,700 | $3,000 |
| $6.5M to $9.5M | $5,100 to $7,100 | $4,500 |
| $9.5M to $12.5M | $6,100 to $8,500 | $6,000 |
| $12.5M to $15.5M | $7,400 to $11,000 | $7,500 |
| $15.5M to $18.5M | $9,400 to $13,500 | $9,000 |
| $18.5M+ | Quoted individually | Quoted individually |
The onboarding fee covers migrating your books back to the start of your last taxable year and getting you fully operational in 60 days. It's billed once, with your first invoice. It's the same for all three tiers. Your first month is prorated, and your monthly engagement starts on the first of the first full month.
Range reflects the three tiers below. Which one you're in depends on how much of the work you want off your desk. No payroll. No hidden line items. The onboarding fee is right here in the table.
You stop guessing.
You get the CFO work. Job costing built against the way you estimate, a 13 week cash forecast, monthly WIP, and a meeting every month that ends in decisions and never in a report.
Your bookkeeper still does the books.
You stop touching the books.
Everything in Core, and we do the bookkeeping and the controllership as well. Your office stops answering coding questions and stops fixing a reconciliation that will not balance on the last day of the month.
We do the books. No payroll.
Every job shows its margin while it is still open.
Everything in Executive, plus the job costing and WIP platform set up, loaded with your cost codes, and managed for you every month. You never have to learn it.
We do the books, the job costing, and the software. No payroll.
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