Key Person Life Insurance

What is key person insurance?

Key person insurance, also referred to as key man insurance or key employee insurance, is a type of insurance purchased by a business to cover the life or health of an employee or owner who is critical to the company’s success.

There are 3 types of key person insurance:

Life insurance

Let’s say you purchase a key person life insurance policy for your important sales manager. If they died, the life insurance proceeds would help you meet financial objectives in their absence and pay for hiring and training a replacement.

Critical illness insurance

With key person critical illness insurance, if your sales manager has an illness covered by the policy, it will pay a lump sum to your business to help cover financial losses or lower productivity from that person being away from work.

Disability insurance

Key person disability insurance can benefit your business 2 ways. If your sales manager becomes disabled, it can help you to continue providing them with a salary until age 65 or they recover, whichever comes first. It can also help you continue paying office expenses and salaries during the time of the disability.

How key person insurance can protect a business

The right insurance coverage can help you:

Cover expenses for you or your family if 1 of you is leaving

Protect your business, if you, or a key employee is suddenly unable to work

Secure or pay off a business loan (known as collateral assignment)

Provide you or your business partner with money to help buy the other person’s share of the business, if 1 of you is leaving.

What is a collateral assignment?

Life insurance not only protects your business, but it can also help it secure loans. In some cases, a new business may not have sufficient assets to secure a loan through traditional means. However, by using collateral assignment, the company can designate a third-party lender as the primary beneficiary of a life insurance policy owned by the business, which is then used as collateral for the loan or line of credit. During the life of the loan, the lender can collect some or all of the policy if necessary, and if the business owner passes away before the loan is repaid, the lender can make a claim against the policy.

The need for personal insurance as well

If you are a business owner, it is crucial to have key person insurance. However, there are also excellent reasons to obtain personal life insurance.

Protect your family’s financial security

As a business owner, it’s crucial to have key person insurance to protect your business, but having personal life insurance is equally important. In the event of an unexpected situation, life insurance can assist your family in paying off personal debts like your mortgage, funding your children’s education, and replacing your income so that they can manage expenses. Life insurance can also help you ensure that any children who are not a part of your business can share equally in your estate.

Leaving a legacy

Life insurance can serve as a means to fund a charitable organization or a private foundation.