Overview of Key Person Insurance

Definition of
Key Person Insurance

Professor A defines Key Person Insurance.

What is Key Person Insurance? Key Person Insurance (also known as key man insurance or business life insurance) is a type of life insurance policy (and sometimes disability insurance) that a company purchases on the life of an owner, a top executive, or another employee considered critical to the business's success. The company is the beneficiary of the policy and pays the insurance premiums. The purpose of this insurance is to provide financial compensation to the business to help it cover losses and continue operations if the insured key person dies or becomes disabled.

Activities Related to
Key Person Insurance

Activities involved in obtaining and managing Key Person Insurance.

Here is a list of Key Person Insurance related activities: Identifying key individuals whose absence would significantly impact the business, Determining the financial value of these key persons to the business, Applying for insurance policies on these individuals, Undergoing medical underwriting (for the insured person), The business paying the policy premiums, Designating the business as the beneficiary, Periodically reviewing coverage amounts to ensure they remain adequate, and Making a claim in the event of the key person's death or covered disability.
This is a crucial part of business continuity and risk management.

The Importance of
Key Person Insurance

Two team members discussing the vital role of Key Person Insurance.

Key Person Insurance is important for businesses, especially small to medium-sized ones, that rely heavily on the skills, knowledge, leadership, or relationships of one or a few individuals. The loss of such a person can lead to decreased sales, loss of customer confidence, disruption in operations, difficulties in securing credit, or challenges in recruiting and training a replacement. The insurance payout provides funds that can be used to cover these losses, hire temporary staff, recruit a successor, pay off debt, or even facilitate an orderly winding down of the business if necessary. It's a strategic tool for business risk management and financial stability.

Key Aspects of
Key Person Insurance

Business as Beneficiary
The company owns the policy and receives the death benefit or disability payout, not the individual's family.

Purpose of Funds
Proceeds are intended to help the business manage the financial consequences of losing a key employee, such as covering lost profits, recruiting and training replacements, or paying off business debts.

Insurable Interest
The business must demonstrate an insurable interest, meaning it would suffer a direct financial loss from the key person's death or disability.

Not Personal Insurance
It's distinct from personal life insurance that an individual might purchase for their family's benefit.

Concepts Related to
Key Person Insurance

Key Person Insurance is a component of business Risk Management and continuity planning. The payment of the Insurance Premium is a business expense (though the tax treatment of premiums and benefits can be complex and should be reviewed with a tax professional). It can be considered a type of business liability insurance in a broad sense, as it covers a liability to the business's operational stability. It is important for overall Financial Planning for the business.