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, the business can lose leadership, experience and specialized skill. Operations could suffer or the company could be forced to shut down, and employees may face job loss.
Key person insurance protects companies. It's a life insurance policy written on the key person's life where the company typically pays the premiums and is the policy beneficiary. For policy options, see Key Employee (Key Person) Insurance.
After the insured key executive dies, the company receives the policy payout. That cash helps the business maintain operations, cover debts, and buy time to hire or reorganize.
Why a Company Should Have Key Person Insurance
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 cash that allows it to pay obligations, maintain daily operations, repay debts, offer severance and support investors while it adjusts.
Affirm key personnel.
Key employees keep the business operating by managing day-to-day activities, attracting customers, hiring staff and resolving problems. Key person insurance signals the value a company places on critical leadership and can help attract and retain talent.
Build trust.
When employees know the company can keep operating after the loss of a key person, they have more confidence in the business and may be more engaged and productive.
How Much Key Person Insurance Should You Buy?
Determining how much key person insurance to buy depends on the business. Start by calculating how much money the company needs to continue operations after a key employee's death, factoring payroll, debt repayment and normal operating expenses.
Also consider how long the company would need funds while recruiting or reorganizing and what the business can reasonably afford in premiums. When you're ready to compare options, review Key Employee Insurance (Life Insurance for Key Employees) for policy types and features.
Key person insurance can give a company the confidence to face the future after the loss of an irreplaceable employee. It provides peace of mind by helping protect the business and the jobs of other employees, so consider making it part of your company's financial planning.
Frequently Asked Questions
Who owns a key person policy?
The company usually owns the policy, pays the premiums and is the beneficiary; the insured is the key employee.
Does the insured employee receive the benefit?
No, the death benefit is paid to the company, not to the insured or the insured's family, unless the company specifies otherwise.
How is the coverage amount determined?
Coverage is typically based on the financial loss the company would incur, such as lost profits, replacement costs, and time needed to stabilize operations.