Key person insurance, also known as key man insurance, is an insurance policy taken out by a business to compensate that business for financial losses that would arise from the death of an important or “key” member of the organization. Key person Insurance policies are usually owned by the business and the aim is to compensate the business for losses incurred with the loss of a key income generator.
The purpose of key person insurance is to help a company survive the loss of the person who makes the business work. Many businesses have a key person who is integral to the company profits, or has a unique and hard to replace skill set that is vital to the organization. An employer may take out a key person insurance policy on the life of any employee whose knowledge, work, or overall contribution is considered uniquely valuable and essential to the company. The employer does this to offset the costs, and can use the insurance proceeds for expenses until it can find a replacement person, or, if necessary, pay off debts, distribute money to investors, pay severance to employees and, if necessary, close the business down in an orderly manner. In a tragic situation, key man insurance gives the company some options other than immediate bankruptcy. Should death occur, key person insurance could be the difference between the company’s downfall and its continued success.
There are four categories of loss for which key person insurance can provide compensation:
- Losses related to the death of when a key person is unable to work, to provide temporary personnel and, if necessary to finance the recruitment and training of a replacement.
- Insurance to protect profits. For example, offsetting lost income from lost sales, losses resulting from the delay or cancellation of any business project that the key person was involved in, loss of opportunity to expand, loss of specialized skills or knowledge.
- Insurance to protect shareholders or partnership interests. Typically this is insurance to enable shareholdings or partnership interests to be purchased by existing shareholders or partners.
- Insurance for anyone involved in guaranteeing business loans or banking. The value of insurance coverage is arranged to equal the value of the guarantee.
Call today to discuss Key Person Life insurance
The knowledgeable professionals at Linda A Christ Insurance Agency are ready to discuss your business and the best way to protect it, your employees, and your shareholders. Call today to set up an appointment.