Courtesy of iii.org
Many companies – especially small businesses with fewer employees – depend on a single person or a few key people for their success. If a key person becomes unable to work or dies, the company may lose valuable accounts or be temporarily unable to operate, which can lead to lost revenue.
The loss of an important employee can damage the company's morale, but the financial consequences can be mitigated if a company buys key person insurance. This type of coverage can enable a company to continue to pay its bills and fund the search for a new employee. In unfortunate cases where a company cannot survive without the key employee, the funds from the key person insurance can be used to pay redundancies to employees, distribute funds to investors and close the business in an orderly manner.
Key person insurance is usually owned. of the company, which pays the premiums. This coverage is also a requirement for most banks and lending institutions when applying for financing or credit.
Who qualifies as a "key person"?
There are no quick rules for identifying key people in your business. . In general, anyone who directly contributes to a company's results or is fundamental to its business can be considered a key person. Examples include:
- C-Suite executives ̵
- Leading sales staff.
- Managers of Product Development.
- Engineers or other difficult to replace staff.
Types of Key Person Insurance
Key Person Insurance is available in the following two forms:
- Key Person Life Insurance —This type of coverage differs from ordinary life insurance in that it specifically covers individuals in a business that is critical to the company's operations. It gives the business an infusion of cash if an insured key employee dies, regardless of cause of death or location. These funds can help compensate for income lost as a result of the death, as well as pay off debts, buy out the remaining shareholders' interest from heirs and finance the costs of a new employee's search or training program. Life insurance for key people can be purchased as term insurance that lasts for a defined period of time or as extended universal or full life cover. The amount of coverage is based on a key person's income, total business income and the part of the income that can be attributed to the key person.
- Key person's disability insurance – This policy provides funds to a company if the insured key employee becomes disabled and unable to work – in whole or in part. While the standard disability insurance covers an employee's lost salary and medical expenses, a key person's disability policy provides financing to a company to compensate for lost income, expenses for hiring a new employee and other related expenses.
Like other disability and life insurance policies, the cost of key personal insurance premiums depends on the age, health and role of key employees as well as the risks the employee takes in their personal lives – for example, does the CEO fly his own plan?  "First-to-die" key person coverage
A cost-effective alternative to buying key person insurance is for a group of executives to agree on a "first-to-die" policy that insures only the first of the group that dies. Once the policy has been used to cover the loss of the first person who dies, another member of the group becomes entitled to cover. Thus, the key person insurance continues for the new members of the management team, but the premiums reflect the fact that only one life is covered at a time.
This type of insurance can be a useful tool when it comes to succession planning. for your business – and having a legacy plan is crucial to ensuring a successful transfer of your business or business interests.
Your insurance staff can provide guidance on options and costs for individual coverage for key people and first-to-die.