Simply put, key man insurance is life insurance placed on the pastor or other key leader and owned by the church. Its purpose is to compensate for financial losses the church may face upon the death of that leader.
KEY MAN INSURANCE FINANCIALLY SUPPORTS A CHURCH IN FOUR IMPORTANT WAYS:
- IT GIVES TIME TO CONDUCT A PROPER SEARCH FOR THE LEADER'S SUCCESSOR
- IT OFFSETS ANY DECLINE IN GIVING
- IF THE CHURCH IS MORTGAGED DURING THIS TRANSITION PERIOD, THE POLICY SHOWS FINANCIAL STRENGTH TO THE LENDER
- LENDERS ARE MORE LIKELY TO RENEW A LOAN WHEN A COLLATERAL ASSIGNMENT IS IN PLACE ON A KEY MAN POLICY
How much Key Man coverage do we need?
Consider the following when applying for key man insurance:
At maximum, insurance companies will insure up to 70% of your total debt. For example, a church with $1 million in loans should aim for $700,000 in debt coverage. Depending on a church's overall debt load, some lenders may require a portion of the key man insurance benefit to be assigned to them.
It can take up to four years to financially recover from the loss of a dynamic pastor. It is usually the second and third year after a pastor's death before a church begins to feel the full effect of the loss. For that reason, it is recommended to obtain coverage based on the church's current annual income. At maximum, an insurance company will cover 70%. For example, if your income is $1 million, aim for $700,000 in coverage. This is in addition to the debt coverage amount.
Using the example amounts, the church would need a total of $1.4 million in key man coverage.