How key person life insurance protects pastors & faith communities

What would happen to your church if tragedy struck and your pastor suddenly died? You likely look to them as a guiding light and voice of reason. But they’re also so much more than that.

Without a leader, attendance could fall, giving could plummet and important decisions would need to be made during a time of significant grief. In those difficult times, the more foundational support and resources available to church administration and members, the better. Life insurance for pastors, or key person life insurance, can be one of those resources.

Key person life insurance is a contract that insures a leader or other critical member of an organization or business. While not exclusively for faith communities, key person life insurance can help your church continue its operations if your pastor dies. It can be a powerful tool for small to midsize churches with limited financial resources, as well as large churches with well-known preachers and leaders.

With key person insurance, the pastor is the insured person on the contract. However, the church owns the contract and pays the required premiums. The church is also the beneficiary, which means it receives the death benefit from the contract. Those proceeds can help provide the financial stability a congregation needs at a critical time.

Like with other types of life insurance, proceeds from a contract’s death benefit can give surviving loved ones some breathing room while they grieve through their loss and get back on their feet. But key life insurance for pastors also can help administrators navigate any dips in morale and momentum by:

• Providing a source of cash to hire a new pastor or a temporary leader.
• Funding church operations, from staff salaries to utility bills.
• Enabling them to make payments on any outstanding loans.

A key person policy also makes it easier for the church to take out loans if, for example, it decides to refinance a mortgage or add onto its existing building. When banks know that the church will receive funds if the pastor should die, they take on less risk. In turn, they're more likely to approve a loan and offer more favorable interest rates.

As a rule of thumb, the coverage amount should be 5-10 times of the pastor's salary. But ultimately, the right amount of life insurance coverage for your church could depend on a number of factors. Before your congregation buys a contract, you should reflect on these questions:

• How long would it potentially take to find a new pastor and recover from any potential dips in church attendance?
• What's the total amount of loan payments the church will need to make while without a pastor?
• What salaries and other operating expenses would the church face?
• If the church may want or need to take out a loan, will the lender require a certain-size policy?

If your church is considering purchasing a contract but has many other financial obligations, term life insurance may be the most fiscally responsible option.

Another option is permanent life insurance. In addition to a death benefit, this type of contract would allow your church to accumulate cash value that it can access during your pastor's lifetime. While whole life and other permanent policies have higher premiums than term coverage, they grow in value over time. They also give the community a possible source of funds whenever the need should arise.

While key person insurance can safeguard a pastor's church and continue their ministry, it's not a personal life insurance contract. Pastors can gain financial security for their family through individual life insurance. While these contracts would be separate, with one funded by the church and one by the pastor, they can work in tandem to help take care of all the people in your pastor's life.

Life insurance can be an important resource for your church leaders, as well as the future success and growth of your congregation. A financial advisor can take a deeper dive into options and ensure that your faith community will be equipped to weather uncertainties.