We protect what we value most with insurance. Car insurance and home insurance ensure that we can
financially survive a major property loss. Life insurance pays money to beneficiaries after a death, acting
as a financial lifeline to the deceased’s loved ones. Business insurance is a hedge against uncertain losses
and unpredictable risks that companies face.
Key person insurance, also called key man insurance, can be thought of as a hybrid between business insurance and life insurance. Companies can take out this type of insurance on the lives of certain employees to cover the risk of losing “key” workers. The company pays the insurance premium, and if the covered employee dies, the business collects the death benefit. Key person insurance can also be structured as a disability policy if the employee becomes disabled.
Investors and lenders may require a key person policy to provide for business continuity. Key person
insurance can be used in partnership buyouts as well.
Key employees are those who have knowledge and skills that significantly contribute to your business income. Although this might sound a little vague, you probably have a good idea of who is indispensable to your business. The following are examples of key persons:
● The owner
● An individual with highly specialized abilities, knowledge, or industry connections
● An employee who single–handedly brings in a large amount of sales or revenue to the company
● An employee whose reputation is of vital importance to the business’s financial viability
A key person could be a salesperson that generates a large share of new business, a chef or a craftsman
whose skill is a huge selling point, or an officer with connections in the business world that are the
lifeblood of the company. A key person is often in upper management, but they do not have to be. They
tend to be highly compensated, which reflects their value to the business.
You know who the key persons are in your company. They are those workers who, if they departed
tomorrow, would have an adverse financial impact on the business and leave you scrambling to replace
them.