Definition
Key person insurance, also known as keyman insurance, key man insurance, or ‘key employee insurance,’ is a kind of business insurance that is critical to the success of a company. The term “key person insurance” does not have a legal meaning. In general, it may be characterized as an insurance policy purchased by a company to pay that company for financial losses that might result from the death or prolonged disability of an essential member of the company’s management team.
Put another way, key person insurance is a regular life insurance or trauma insurance coverage that is utilized for company succession or business protection objectives, rather than for individual protection. There is no extension of the policy’s duration beyond the time during which the key person is of value to the company. Significant person policies are often held by the company, and its purpose is to pay the company for losses sustained as a result of the death or disability of a key revenue producer while also facilitating business continuity.
What is ‘Key Person Insurance’
A life insurance policy on the life of a top executive that is purchased by the firm. The firm is the plan’s beneficiary, and it is responsible for paying the insurance premiums.
Explaining ‘Key Person Insurance’
It is necessary to obtain key person insurance if the abrupt loss of a senior executive will have a significant negative impact on the company’s operations. With the compensation granted by the executive’s death, the corporation is effectively given more time to locate a replacement or to pursue other initiatives to salvage the company.
Key Person Insurance FAQ
Who can get key person insurance?
The important person being insured must possess less than 51 percent of the company's stock, and the total number of shares owned by the key person and their family must account for less than 70 percent of the company's entire stock market capitalization.
What are the benefits of key person insurance?
Key person insurance protects firms against the loss of income if a key employee becomes terminally or seriously sick, or if the individual dies while on the job. The funds may be utilized to locate a suitable substitute. Key person insurance may aid in the continuation of a company's operations.
Is Key Person Insurance expensive?
Many businesses may consider key man insurance to be an unnecessary luxury. It is often prohibitively costly, and it protects against a risk that most organizations seek to avoid at all costs. However, for many businesses, regardless of their size or income, the loss of a single significant contributor might be catastrophic.
Further Reading
- A theoretic analysis of key person insurance – www.sciencedirect.com [PDF]
- Key person insurance: Who needs it – search.informit.com.au [PDF]
- Attitudes of Nigerians towards insurance services: An empirical study – papers.ssrn.com [PDF]
