Overview of Key Person Insurance
The loss of a key person can be devastating to the financial well being of a business. Key Person insurance provides businesses the extra protection that they need to survive by minimizing the organizational loss and financial strain that follow the death or disability of a key employee.
What is Key Person Insurance?
Key Person insurance is insurance placed on the lives of key individuals, with the company acting as owner and beneficiary of the policy. As beneficiary of the policy, the company is reimbursed for the death or disability of a key individual with tax-free dollars, which can be used to:
- Minimize the organizational loss and financial strain that follow the death
or disability of a key person.
- Hire a successor
- Replace lost revenues
- Liquidate outstanding obligations
- Redeem stock
Who is a Key Person?
A key person is someone who's activities regularly and substantially increase business revenues. And, who's death or disability would have an adverse economic effect on the business. Sample characteristics of a key person are:
- High salary- usually an indication that management believes the person
to be a valuable asset
- Decision making power
- Control
- Talent- a person with a unique talent or skill that is difficult or costly to
replace
When & Where is Key Person Insurance Most Often Used?
Key person insurance is widely used in Corporate America. Some examples of when and where key person insurance may be needed are:
- The business is closely held
- There is no highly defined corporate succession plan in place
- A few individuals do the work of many
- Liquid surplus to meet emergencies is limited
- Lenders or funding companies require it to protect their investment
- Clients will be lost in the event of a key individuals death or disability