Key-person life insurance is a policy that a company purchases to cover the life of its owners, a top executive, or another employee who is critical to the functioning of the business. This life insurance policy provides financial assistance to the business to cover the loss of the covered key person in the event of their death. This money buys the business some time to either hire a replacement, find a buyer for the business, or wind down operations, if necessary.
If there is anyone your business couldn’t possibly function without, you should look into a key-person life insurance policy for that person. For many companies, key people include the owners, founders, or a top executive or two. If a person’s absence would cause major financial harm to the business if they were to die, they qualify as a key person. Whose loss could cause business to come to a standstill?
What type of protection does this policy provide?
- It can protect revenue. The payout can cover loss of income from sales the key person would have handled that are not delayed or cancelled.
- It can protect shareholders or partner interests. In a business with multiple partners or shareholders, this policy allows the surviving partners or shareholders to purchase the financial interest held by the person who died.
- It can protect a bank or other guarantor of business loans. The business should purchase coverage at or above the amount of any debts the business holds.
This differs from a personal life insurance policy because the business purchases the coverage and is the designated beneficiary. This is not the same as a company-provided personal life insurance benefit, where the employee chooses the beneficiary.
The payout from a key-person life insurance policy can cover the costs of replacing the key employee, including recruiting and training. In the event of the owner’s death, the business could also use this money to pursue a buyer to take ownership of the business and continue operations. If the business can’t find a way to continue operations or get acquired, then the payout can be used to pay off debts, give severance to employees, and close the business while avoiding bankruptcy.
Key-person life insurance is a great way to protect your business. If you think this might be a good fit for your company, let us know. We can walk you through your options. Contact our team of commercial lines agents here at Kamm Insurance Group!