Key person life insurance, also known as key man insurance, is a type of life insurance policy that a business takes out on the life of a key employee. The purpose of this insurance is to help the company financially if the key person unexpectedly dies.
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Purpose:
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Financial Protection: Provides a death benefit to the company to help cover the financial losses that may occur due to the death or incapacitation of a key individual.
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Business Continuity: Helps ensure the business can continue operations without significant disruption.
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Debt Repayment: Can be used to pay off business debts, maintain cash flow, and cover costs associated with hiring and training a replacement.
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Who is Covered:
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Key employees whose skills, knowledge, or leadership are crucial to the business's success, such as owners, executives, or employees with unique technical expertise or substantial client relationships.
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How it Works:
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Policyholder: The business is the policyholder and pays the premiums.
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Insured: The key person is the insured individual.
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Beneficiary: The business is the beneficiary and receives the death benefit if the key person dies.
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Benefits:
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Financial Stability: Provides a lump sum that can be used to stabilize the company’s finances, allowing time to find and train a replacement.
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Creditworthiness: May improve the company’s creditworthiness since lenders and investors may view the business as more secure with this protection in place.
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Employee and Stakeholder Assurance: Demonstrates to employees, clients, and stakeholders that the company has a plan for unexpected events, which can help maintain confidence in the business’s stability.
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Types of Policies:
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Term Life Insurance: Provides coverage for a specific period, such as 10, 20, or 30 years. It is typically less expensive and is suitable if the key person’s contribution is expected to be critical for a limited time.
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Permanent Life Insurance: Provides coverage for the key person’s entire life. It is more expensive but can be used if the key person’s contribution is expected to be critical for an indefinite period.
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Policy Details:
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Coverage Amount: Determined based on the key person’s role, the financial impact of their loss, and the cost to replace them.
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Premiums: Paid by the business, and the cost can vary based on the key person’s age, health, and the amount of coverage.
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