Key person insurance is an arrangement where a business purchases life insurance on the life of a key employee to help the company survive financially if something happens to that key employee. The key person policy can either be term insurance or permanent insurance, depending on the goal.
Key Person Insurance Benefits
In the event of the death of a key person, key person insurance will help ensure that the company can survive and maintain business operations. The policy will help cover expenses which could have potentially been lost due to the death of the key person. The coverage can help businesses with the following:
- Replacing The Key Person
- Paying Investors
- Paying Business Debts
- Properly Closing The Business
Determining Who Is A Key Person
A key person is anyone in the business who is critical to the success of overall business operations. Looking at your staff and determining whether or not the business could function without their presence is the ideal way of deciding who should have a key person insurance policy. Typically, key people hold some or all of the following roles:
- Employee Management
- Client Account Management
- Financial Account Management
While the main purpose of key person insurance is to provide a death benefit to the business in the event of the premature death of an essential employee, it can also be used as a way to provide the key person with supplemental non-qualified retirement benefits.