Key Person Insurance: What Is It & How Does It Work?
Imagine your company’s top performer suddenly becoming unavailable—what would happen to your operations and revenue?
Key person insurance is a crucial financial safeguard that protects companies from the disruption caused by the unexpected loss of a critical employee whose skills, knowledge, or leadership are vital to the business’s success. This insurance covers the financial impact of losing such a key team member due to death, disability, or severe illness, providing funds to cover recruitment, training, and potential lost revenue.
WHAT IS THE MAIN PURPOSE OF KEY PERSON INSURANCE?
Think of this coverage like a life insurance policy a business enrolls in for an employee. In this case, key person insurance offers financial support to your organization after losing a stakeholder, founder, or essential employee due to a disaster or unexpected loss, leaving them unable to work.
Therefore, the primary purpose of key person insurance is to offset specific financial consequences a company faces after losing someone vital to its operations and success.
UNDERSTANDING KEY PERSON INSURANCE: HOW IT WORKS
An insurance company like ours helps you purchase a life insurance policy on a key employee, partner, executive, etc. Your company owns the policy and pays the premiums as the beneficiary. Providers base that premium on a variety of criteria that can include:
- Age
- Gender
- Health
- Type of policy
- Type of company and its structure
TYPES OF KEY PERSON INSURANCE
Working with a team specializing in key person insurance allows businesses to curate coverage based on their needs, whether they need a low-cost policy or a permanent life insurance plan.
Generally, the main types of key person insurances to know are:
- Key Person Life Insurance: This type of insurance provides a lump-sum payment to the beneficiary—in this case, the company—if the key person passes away during the policy term. Options include whole life key person insurance and term life key person insurance.
- Key Person Disability Insurance: This type of insurance provides regular income payments to the company if the key person becomes disabled or unable to perform their duties due to injury.
- Variable Life Key Person Insurance: This option is similar to a life insurance policy but comes with a small level of risk. For example, your premiums are transferred to investment accounts and fluctuate in value depending on the market.
WHAT KEY PERSON INSURANCE COVERS
In the event of a key person’s passing or inability to work due to illness or disability, the policy provides a cash benefit payout to the company. A business can then use those payments to offset expenses in the following ways:
HIRING AND TRAINING COSTS
Your business can use benefits to cover recruiting, onboarding, and training expenses.
REPLACING LOST REVENUE AND EARNINGS
Key person insurance can help offset the lost revenue and profits previously generated by the individual as the company seeks a suitable replacement.
DISABILITY OR LEAVE COVERAGE
The policy may also provide benefits if an essential team member takes a temporary leave from work due to a disability or other injury.
WHO SHOULD GET KEY PERSON INSURANCE?
We support a wide range of businesses by enrolling them in curated coverage. In our experience, we recommend any business that relies on the skills, knowledge, or relationships of a specific employee, executive, or owner to enroll in a key person insurance policy, including:
- Small businesses and startups where the founders or principal owners are vital to your operations and growth
- Companies with irreplaceable subject matter experts
- Organizations where key leaders or executives drive a significant portion of revenue or hold meaningful client relationships
- Businesses with partners or co-owners whose absence could severely impact the company’s ability to function
HOW MUCH KEY PERSON INSURANCE DO I NEED?
It’s recommended that your coverage includes reimbursements for eight to 10 times the salary of the individual you insure. We also advise businesses seeking this type of coverage to speak with an expert agent to discuss additional benefits involving training expenses or hiring costs.
HOW DO I KNOW SOMEONE IS A KEY PERSON?
We offer businesses tailored advice on selecting the right individuals to cover with this type of insurance. That includes asking leadership questions to understand their organization chart to ensure the “key person” is covered appropriately.
In most cases, we recommend considering coverage for the following employees:
- Employees with specific technical expertise
- Those with unique skills or training
- Anyone in your leadership team or those with decision-making responsibilities
- Team members with exclusive ties to customers and suppliers or those involved with business development and client relationships
CONTACT US ABOUT KEY PERSON LIFE INSURANCE
Every company has one or more essential employees or stakeholders who are vital to its growth and success. Remember, you can always prepare for the unexpected. Key person insurance provides a financial safety net designed to support your business as you plan for the future.
Contact our knowledgeable insurance team to have us curate coverage to your needs or explore your benefit options. Once we receive your inquiry, we’ll follow up with additional information and tactics on how to best support your needs.
