Key Personnel Insurance: What Is It and Who Needs It?

Is the success of your business dependent on a single person or a key group of people? Could your company survive without you or other leaders?

Many small businesses would suffer greatly from the death of one valuable employee. This is where key personnel insurance comes in.

If a company could face closure after the loss of an important employee, key personnel insurance can provide the financial stability for the business to survive this loss. In instances where it is not feasible for the company to go on without the key employee, the funds from this policy can provide severance to employees, funds for investors, and a budget to close the business smoothly.

This coverage is available in two forms: key person life insurance and key person disability insurance.

The life insurance policy pays the business if the key employee dies. The funds can be used to pay off debts, buy out surviving shareholders, cover costs of replacing the employee, and provide for revenue that is lost due to the employee’s absence. The policy can be set up as term or whole life insurance.

The disability policy provides funds to the business if the key person becomes unable to work, either entirely or partially. Rather than pay the employee as typical disability insurance would, the policy provides funds for the company to compensate for lost revenue or to hire a replacement.

The amount of coverage for either policy should be based on the key person’s income and the portion of the overall business revenue that this reflects. These funds could provide the lifeline a company needs to survive a significant employee loss.