Key Person Life Insurance
In order to thrive and profit your business is dependent on you, your employees and the demand for your product or service. While you can’t buy insurance against the loss of demand for your business, you can buy an insurance policy that protects you in the event that you lose an employee who is fundamental to the creation, operation and continuation of your business. This protection comes in the form of key person life insurance coverage.
The Goal of Key Person Life Insurance
Key person life insurance coverage (once called key man insurance) is an insurance policy that pays a death benefit out to you, the business owner, in the event of the death of one of your more important employees. The policy is paid for by your business, taken out with the employee’s knowledge, and the death benefit is not meant for the employee’s family or other personal beneficiaries.
Now you might be thinking to yourself, “Well, all of my employees are important and my business would suffer if any of them were to die.” But key person insurance coverage is not meant for rank-and-file employees—it is meant to give your business some form of financial recompense in the event that an individually vital employee with proprietary and hard to replace talents, knowledge or skills passes away. This will generally be an employee who is not easily replaced based on the extent of their expertise, experience and abilities.
Consider your customer service representatives. If one of them were to leave your company unexpectedly you could put an ad in the local paper and have many qualified applicants at your door within 24 hours. Once you chose one of them to replace your former employee, it would be relatively easy to train him or her to fill the customer service role. Yes your company might suffer a slight loss in prompt customer service reaction time while you are hiring and training, but it would not be major or truly detrimental and would be easy to recover from. Because this role is not hard to fill and that employee not difficult to replace, there would be no insurable interest and you would be unable to buy a key person life insurance policy on them.
Who is a ‘key person’?
The employment traits that qualify an employee as a key employee are not necessarily based on their pay grade, title or number of years with your company. The hard-to-replace traits of the employee can be intangible, intellectual, strategic, or psychological, but they must be substantial enough to prove that you, as an employer, have insurable interest in insuring this employee.