1. Home
  2. Knowledge Base
  3. Key Person Insurance Definition

Key Person Insurance Definition

Key Person Insurance Definition

This is a life insurance policy bought by an organization on the life of one of its key executives. The organization pays the policy premiums and is the sole beneficiary in case of the death of the executive. It usually referred to as ‘key man insurance,’ ‘business life insurance’ or ‘key woman insurance.’

A Little More on What is Key Person Insurance

This type of insurance policy is usually purchased if the unexpected death of a principal executive would result in a significantly negative impact on the operations of the company. The company uses the amount paid upon the death of the executive in buying time to find a replacement or implement corrective strategies that may save the business.

The key person in a small business usually is the owner, founders or a key or few key employees. The key person is determined by the fact that their absence would amount to the sinking of the company. In such cases, key person insurance is considered.

How Key Person Insurance Works

The company purchases the policy on its key executives, pays the premium and is the beneficiary of this policy. If death occurs, the insurance firm pays off the policy to the company.  The company uses these funds in a variety of ways including paying off debts, paying severance to employees, distributing money to investors and also shutting down the business in the correct procedure. This insurance policy provides companies with several options apart from bankruptcy.

The top officials of companies consider an irreplaceable employee in the short term to decide if the company should consider such coverage. In most small businesses, the owner does most of the work so without him/her the business would dissolve.

The amount of insurance needed depends on the business although usually, companies ask for quotes on $100,000, $250,000 up to $1 million policies and then compare the costs associated with each policy.

Categories of Loss Covered by Key Person Insurance.

The losses arising from an extended period in which the key person is not able to work but is still alive.

  •         Insurance to safeguard profits such as losses that may arise from the delay or cancellation of a business project in which the key person is a part of.
  •         Insurance to protect the interests of shareholders or a partnership. It allows the shareholders or partnership interests to be bought by the existing shareholders or partners.
  •         Insurance for people who are a part of guaranteeing business loans or banking facilities. The value of the insurance coverage is adjusted to be equivalent to the value of the guarantee

References for Key Personal Insurance

Academic Research on Key person Insurance

Was this article helpful?