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Key Person Insurance is a life insurance policy that a company purchases on a key executive's life. The company is the beneficiary of the plan and pays the insurance policy premiums. This type of life insurance is also known as "key man insurance," "key woman insurance" or "business life insurance."
Key person insurance is needed if the sudden loss of a key executive would have a large negative effect on the company's operations. The payout provided from the death of the executive essentially buys the company time to find a new person or to implement other strategies to save the business.
In a small business, the key person is usually the owner, the founders or perhaps a key employee or two. The main qualifying point would be if the person's absence would sink the company. If this is the case, key person insurance is definitely worth considering.
For key person insurance policies, a company purchases a life insurance policy on its key employee(s), pays the premiums and is the beneficiary of the policy. In the event of death, the company receives the insurance payoff. These funds can be used for expenses until it can find a replacement person, pay off debts, distribute money to investors, pay severance to employees and close the business down in an orderly manner. In a tragic situation, key person insurance gives the company some options other than immediate bankruptcy.
What are the benefits of key person insurance?
The benefits of key man insurance are that you can insure against the drop in sales and profit this may result in while your team member is out of action. You can also stabilise the value of your shares by protecting your business against perceived uncertainty.
It can take considerable time and money to recruit and train a suitable replacement when your key person is unable to work. The last thing you want is for your business to be floundering in the meantime.
The stress that an absence places on the business and your other employees, both in terms of increased workload and emotional repercussions, can't be underestimated. Having key person insurance in place ensures that, if the worst does happen, and you lose a vital member of your team, you can at least weather the storm and ensure your business transitions to its next phase as smoothly as possible - and with team morale intact.
To determine if a business needs this kind of coverage, company executives must consider who is irreplaceable in the short term. In many small businesses, it's the owner who does most things - keeping books, managing employees and handling key customers, etc. Without this person, the business would come to a stop.
To set certain expectations we have created a Life Insurance Exam Guide to assist with preparing for the exam.