KEY EMPLOYEE (PERSON) INSURANCE

Key Person Insurance is defined as a combination of life and disability 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 insurance may also be known as "Business Continuation Insurance".

                    How Key Person Insurance Works

In regards to Key Person Insurance policies, a company purchases a life insurance policy on its key employee(s) or business partner, pays the premiums and is the beneficiary of the policy. In the event of death or disablement, the company receives the insurance funds. 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.

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 or who would exactly be considered a 'key employee' 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 so forth, and compare the costs of each.

  Loss Covered by Key Person Insurance

• Losses related to an extended period when a key person is unable to work, but has not died.
• 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.
• Insurance designed to protect shareholders or partnership interests. Typically, this insurance enables shareholders or partnership interests to be purchased by existing shareholders or partners.
• 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.