What Is Key Person Insurance and How Does It Work?

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A key person insurance policy is a life insurance policy purchased by a corporation on the life of an owner, a senior executive, or another individual deemed vital to the organization. The firm is the policy's beneficiary and pays the premiums. This is also known as "key man (or "keyman") insurance," "key lady insurance," and "business life insurance."

Important Takeaways

  • A key person insurance policy is a life insurance policy purchased by a corporation to cover the death of senior executive or other vital personnel.

  • Such insurance is required if the death of that individual would be catastrophic to the company's future.

  • The owner or creator of a small firm may be the main individual.

  • The firm pays the insurance payments and is the beneficiary of the policy if the individual dies.

Key Person Insurance Explained

  • If the sudden loss of a certain individual would have a profoundly damaging impact on the company's procedures, key person insurance provides a financial buffer. The death benefit realistically gives the firm time to employ a replacement or apply other methods to save the firm.

  • The important person in a small firm is mostly the owner or the founders, or possibly an employee who holds crucial job. The basic criterion is whether the absence of the individual would cause the organization significant financial loss. If this is the case, key person insurance is absolutely something to seriously consider.

  • In addition to life insurance, key person insurance offers disability reimbursement in the event that the individual becomes disabled and is unable to work.

Key Person Insurance: How Does It Work?

The organization purchases life insurance policy for its key employees for whom and becomes the beneficiary and keeps paying the premiums for the same. On the occasion of the key person’s demise, the organization will now be able to utilize the policy and claim the death benefit.

Financial expenditure is utilized to continue operating the firm and to hire other key individuals. It could also be used for repayment of outstanding debt that the company has, or clearance of dues in a phased manner. It thus offers an organization several options apart from declaring bankruptcy.

What is the cost of Key Person Insurance?

The amount of insurance required by a company will be dependent on the size and type of the firm, as well as the position of the key individual. It’s advisable to get quotations from several leading insurance companies between the range of $100,000 to a $1 Million and compare the price accordingly.

Like other insurance policies, the cost will be directly proportional to the factors of age, health and other parameters for risk before issuing the policy.

Updated on 02-Jul-2021 07:35:46