What is 'Key Person Insurance'

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."

BREAKING DOWN 'Key Person Insurance'

Key person insurance is needed if the sudden loss of a key executive would have a large negative effect on the company's operations. The payout provided from the death of the executive essentially buys the company time to find a new person or to implement other strategies to save the business.

In a small business, the key person is usually the owner, the founders or perhaps a key employee or two. The main qualifying point would be if the person's absence would sink the company. If this is the case, key person insurance is definitely worth consideration.

How Key Person Insurance Works

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.

How much insurance is needed depends on the business, but in general, a business should buy whatever they can afford. Companies should ask for quotes on $100,000, $250,000, $500,000, $750,000 and $1 million policies, and compare the costs of each.

Categories of Loss Covered by Key Person Insurance

  1. Losses related to an extended period when a key person is unable to work, but has not died.
  2. Insurance to protect profits...for example, offsetting lost income from lost sales, losses resulting from the delay or cancellation of any business project in which a key person was involved.
  3. Insurance designed to protect shareholders or partnership interests. Typically, this insurance enables shareholder or partnership interests to be purchased by existing shareholders or partners.
  4. Insurance for anyone involved in guaranteeing business loans or banking facilities. The value of insurance coverage is arranged to equal the value of the guarantee.
RELATED TERMS
  1. Life Insurance

    Life insurance is a contract in which the insurer guarantees ...
  2. Annual Renewable Term (ART) Insurance

    A form of term life insurance that offers a guarantee of future ...
  3. Business Insurance

    Business insurance coverage protects businesses from losses due ...
  4. Insurance Industry ETF

    A sector-following fund that invests primarily in insurance companies, ...
  5. Wholesale Life Insurance

    A type of employer-sponsored protection against the loss of income ...
  6. Associate In Personal Insurance ...

    A designation earned by professionals looking for training in ...
Related Articles
  1. Insurance

    How Much Life Insurance Should You Carry?

    Before purchasing life insurance it important to decide if you really need it, what type of policy is best, and how much coverage you should get.
  2. Insurance

    Understanding Your Insurance Contract

    Learn how to read one of the most important documents you own, your insurance contract.
  3. Insurance

    Bundle Your Insurance For Big Savings

    Bundling your insurance can save you money and time. Read on to see how get the most out of multiline insurance discounts.
  4. Insurance

    How to Pick the Right Life Insurance Plan

    Finding the right life insurance policy - if you need one at all - can be more challenging than it seems. Use this guide to find the right one for you.
  5. Insurance

    Tips for Helping Clients with Life Insurance Needs

    Life insurance needs will likely change over the client’s lifetime and again financial advisers can provide an objective sounding board.
  6. Insurance

    The History Of Insurance In America

    Insurance was a latecomer to the American landscape, largely due to the country's unknown risks.
  7. Insurance

    The Best Type Of Life Insurance For You Right Now

    Different stages of life call for different amounts of life insurance coverage. Find out what you need, when and why.
  8. Insurance

    How to Protect Your Income No Matter What

    What does it mean to insure your income? Here are a variety of ways to do it and some insights into when it might make sense to invest in income insurance.
  9. Insurance

    Life Insurance: How Long Does It Take To Get Paid?

    How to file for a life insurance payout – and how long it takes to receive it. Plus, new ways to plan for payments that provide an income stream.
RELATED FAQS
  1. What are some examples of when insurance bundling is a bad idea?

    Learn about situations where insurance bundling may not be a favorable option. Bundling insurance is often a good idea, but ... Read Answer >>
Hot Definitions
  1. Financial Industry Regulatory Authority - FINRA

    A regulatory body created after the merger of the National Association of Securities Dealers and the New York Stock Exchange's ...
  2. Initial Public Offering - IPO

    The first sale of stock by a private company to the public. IPOs are often issued by companies seeking the capital to expand ...
  3. Cost of Goods Sold - COGS

    Cost of goods sold (COGS) is the direct costs attributable to the production of the goods sold in a company.
  4. Profit and Loss Statement (P&L)

    A financial statement that summarizes the revenues, costs and expenses incurred during a specified period of time, usually ...
  5. Monte Carlo Simulation

    Monte Carlo simulations are used to model the probability of different outcomes in a process that cannot easily be predicted ...
  6. Price Elasticity of Demand

    Price elasticity of demand is a measure of the change in the quantity demanded or purchased of a product in relation to its ...
Trading Center