What would happen to your church if the pastor unexpectedly died tomorrow? Would people leave? Would giving decline? Would the church still be able to pay bills? How might ministry be affected?
Unfortunately, most churches do not fully consider these questions until they experience the untimely death of a leader. For them, recovery can be difficult and long. Although it can never bring back a beloved minister, being prepared ahead of time with key man insurance can greatly assist a church's recovery from a financial standpoint.
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 two areas 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.
Consider Personal Life Insurance As an Added Benefit
A church may purchase a separate life insurance policy for the pastor in addition to key man insurance. This benefits the pastor's family by allowing the pastor to own the policy and name the beneficiaries. It also makes the policy portable. It should be separate from the key man policy and the church should 1099 or W-2 the pastor for the premium. This alleviates the possible taxation of the death benefit to the beneficiary.
How Much Personal Life Insurance Should a Pastor Have?
At minimum, it is recommended that a pastor obtain 5-10 times his or her annual salary, plus 70% of personal debt. Also, consideration can be given for the number and ages of children as well as spousal income.
For more information about key man insurance for your ministry, call 866.621.1787 or click here to request a free quote.