Key Person Life Insurance
by Takara Alexis

Every company should decide if it needs key man insurance, a type of insurance policy that covers the business' most valuable employee. Key man insurance is also known as key person insurance or key executive insurance and can help offset the costs of replacing the key person in the instance of a death, disability or other trauma.

The key man named on the insurance policy could be a business partner, a sales person, the company's founder, a majority stockholder, or another employee who has key skills or knowledge. The key man is a person who contributes significantly to generating profits for the company. Their expertise or skills are very valuable and costly to replace.

If you are trying to think of the key person in your company, think about whose loss would significantly impede business progress in terms of stability and profitability. If you lost this person the business would struggle and might close eventually. It would be pricey and time consuming attempting to replace your key person.

Key man life insurance has a certain amount listed on the insurance policy. The insurance policy will offset the price of replacing a lost key employee including finding and training a new employee. Some insurance policies allow the company to purchase the key man's stock or interest in the company. The benefit could also be used to offset profit losses and lost sales during the time it takes to replace the key man.

Although the key man is named on the insurance, key person life insurance does not help the employee directly. Instead, the company who purchases the insurance receives the benefits of the policy. Key man insurance is not intended to compensate the employee or his family in the event of death or disability - that is what personal life insurance and disability insurance are for.

Key man insurance won't take care of every employee loss event. For example, retirement is not typically covered since that is a usual and expected part of the employee life cycle. The business should have adequate time to plan for the key man's retirement. Specific types of dismissals and resignations are also uncovered.

You may be able to counteract the price of key man insurance by diminishing insurance premiums as a business expense. Your accountant can give you additional information.