What is Key Person Insurance?

Key person insurance is one tool companies use to protect their business in case an important person in the company dies suddenly. Whether or not you're a key person at your workplace, understand this valuable coverage since it potentially affects your job security.

What is Key Person Insurance?

When a company's owner, president, manager or other key employee dies, it loses valuable leadership, experience and skill. Operations could suffer or the company could be forced to shut down, and you as an employee could lose your job.

Key person insurance protects companies. It's a life insurance policy written in the key person's name. That person receives no immediate benefit, though. Instead, the company pays the policy's premiums and is the policy's beneficiary. It receives the policy's payout after the insured key executive suddenly dies. That cash allows the company to continue operating as normal until they can find another executive or adjust operations and successfully navigate the loss.

Why a Company Should Have Key Person Insurance

A company should purchase key person insurance for several reasons.

Continue operations.

The loss of a key person can cause a company to lose customers and face financial hardship. With key person insurance, the company receives valuable cash that allows it to pay financial obligations, maintain daily operations, repay debts, offer severance to employees and pay investors. It keeps a company afloat until someone else takes over the leadership or another strategic plan is put in place.

Affirm key personnel.

A company's key employees keep the business operating as they manage day-to-day operations, attract new customers, hire quality employees and manage conflicts. Key person insurance affirms the value a company places on their key people and can be an effective tool that attracts and retains quality leadership.

Build trust.

When employees know that their company will continue operating as normal even if a key person dies, they have more confidence and trust in their company. They will work harder because of this trust.

How Much Key Person Insurance Should You Buy?

Determining how much key person insurance to buy depends on your business. Start by calculating how much money your company needs to continue operations successfully after your key employee dies. Factor in payroll, debt repayment and normal operating expenses. Then consider your budget. You're now ready to get key person insurance quotes.

Key person insurance gives a company confidence to face the future after an irreplaceable employee dies. It gives you valuable peace of mind because it can ensure you keep your job even if a key person at your company dies. Make sure it's part of your company's financial portfolio.
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Further Reading
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