Matador Insurance Services

Life Insurance

What Is Key Person Insurance?

important businessman covered by key person insuranceA key person insurance policy is a life insurance policy purchased by a corporation on the life of an owner, a top executive, or another person deemed vital to the company. The corporation is the policy’s beneficiary and is responsible for paying the premiums. “Key man (or “keyman”) insurance,” “key lady insurance,” and “business life insurance” are all terms used to describe this sort of life insurance.

Interpreting Key Person Insurance

If the sudden loss of a key employee would have a significant negative impact on the company’s operations, key person insurance provides a financial cushion. The death benefit effectively buys time for the corporation to identify a replacement or pursue other plans to save (or shut down) the company.

The important person in a small business is usually the owner, the founders, or a key employee or two. The fundamental criterion is whether the person’s absence will result in significant financial loss to the organization. If this is the case, key person insurance is something to think about. In addition to life insurance, key person insurance can be used as disability insurance in the event that the individual becomes incapacitated and unable to work.

The Key Person Insurance Process

training new employeesA firm purchases a life insurance policy on a specific employee(s), pays the premiums, and is the beneficiary of the policy for key person insurance. The corporation receives the death benefit from the policy if the person dies.

That money could be used to pay for the costs of finding, hiring, and training a replacement for the dead employee. If the company believes it won’t be able to continue operating, it can use the funds to pay off debts, distribute funds to investors, provide severance packages to employees, and shut down the business in a timely manner. Other than immediate bankruptcy, key person insurance gives the company some options.

To evaluate if a company needs this level of protection, executives must assess who is irreplaceable in the short term. In many small firms, the owner is responsible for the majority of tasks, such as bookkeeping, employee management, and dealing with critical customers. The company may come to a halt if this person is not present.

Loss Classifications of Key Person Insurance

A company’s key person insurance can protect it from a variety of threats. It could, for example, provide:

    group of important employees

  • Profit protection insurance, such as offsets for missed sales or losses resulting from the delay or termination of any business initiative involving a key individual.
  • Shareholders’ or partnership interests are covered through insurance. Typically, this allows remaining shareholders or partners to purchase the deceased person’s financial interests.
  • Anyone involved in guaranteeing commercial loans or banking facilities is covered by insurance. The value of insurance coverage is set to be equal to the guarantee value.

Contact Matador Insurance to Learn More about Key Person Insurance

If you have any questions or concerns, please don’t hesitate to reach out to the helpful staff at Matador Insurance Services or request a consultation online. We can assist you in taking the next steps of obtaining key person insurance and can walk you through the process with a sense of ease and in a stress-free manner.