When a key person in a business dies it can have a devastating financial effect. You can help safeguard your business against the death, terminal or critical illness of a key person with key person protection.
Key Person Insurance is a life insurance policy that a company purchases on a key executive’s life. The company is the beneficiary of the plan and pays the insurance policy premiums. This type of life insurance is also known as “key man insurance,” “key woman insurance” or “business life insurance.”
- Key Person Insurance is a life insurance policy a corporation buys on the life of its top executives.
- Such insurance is needed if that executive’s death or inability to work would be devastating to the future of the company.
- For small businesses, the key person might be the owner or founder, and in some cases, the only person capable of running the business.
- The company pays for the insurance, pays the premiums and is the policy beneficiary, should the person die or become incapacitated.
For key person insurance policies, a company purchases a life insurance policy on its key employee(s), pays the premiums and is the beneficiary of the policy. In the event of death, the company receives the insurance payoff. These funds can be used for expenses until it can find a replacement person, pay off debts, distribute money to investors, pay severance to employees and close the business down in an orderly manner. In a tragic situation, key person insurance gives the company some options other than immediate bankruptcy.
To determine if a business needs this kind of coverage, company executives must consider who is irreplaceable in the short term. In many small businesses, it’s the owner who does most things – keeping books, managing employees and handling key customers, etc. Without this person, the business would come to a stop.