What Is Key Person Insurance?
Key person life insurance is intended to pay your business money if an insured founder or employee it depends on dies.
What Does Key Person Insurance Cover?
Key person life insurance is intended to provide money to the business if an insured person the business depends on dies. 1Business Continuity After a Death
Confirm who will own the policy, who is insured and who will receive the proceeds; protection for the business is a different objective from money intended for the person’s family. 1,2,4Identify the People the Business Depends On
A key person may be a founder, partner or employee with expertise, relationships or responsibilities that are difficult for the business to replace. 1| Role to describe | Why it may matter to the business | Question to keep separate |
|---|---|---|
| Founder with customer relationships | Revenue depends on those relationships | Who owns the policy and who receives the proceeds? |
| Senior technical employee | Replacement would take time and training | Is the concern death, disability or both? |
| Partner with operational responsibility | Day-to-day work would be disrupted | Is the objective business continuity or an ownership buyout? |
Who Needs Key Person Insurance?
Consider this when losing a founder, partner or employee would materially affect revenue or leave you with substantial replacement costs. 4
Coverage Examples
These are examples, not coverage guarantees. Your policy terms and the facts of the claim determine what is covered.
What happened
Your Business Loses a Founder
A founder dies, leaving the business without key customer relationships and technical knowledge.
What happened
A Key Employee Becomes Unable to Work
An employee your business depends on becomes unable to work because of a disability.
How Much Protection Should You Discuss?
Estimate what losing the person would cost your business. Include their contribution to revenue, recruitment and training costs, and the time needed for a replacement to become effective. A technical specialist may take months to replace even when their salary is only a small part of the financial impact. 1
Contribution, Replacement and Downtime
| Part of the estimate | What to bring to the conversation |
|---|---|
| Contribution to revenue | How the person’s work currently supports sales or delivery |
| Replacement cost | Recruiting, hiring and training expense |
| Time to restore capability | How long the business would operate without that person’s skills |
How Do You Compare Coverage and Costs?
Coverage Period and Premium Commitments
A term life policy covers a specified period; compare that period with how long the business expects to need protection. 2 Compare premiums over the period you expect to keep the policy, along with renewal options and which values or benefits are guaranteed. 2How Does It Compare With Related Coverage?
Death, Disability and Overhead
Death and disability are different events to insure: key person disability coverage is a separate option to discuss if the business is concerned about someone becoming unable to work. 3,1 Discuss key person protection separately from funding an ownership buyout or paying business overhead during an owner’s disability. 3,4,1| Objective | Event in view | Keep distinct from |
|---|---|---|
| Key person life | Death of the insured person | Family life insurance proceeds |
| Key person disability | The person becomes unable to work | A death benefit |
| Overhead expense | Ongoing business expenses during an owner’s disability | Key person life or replacement disability |
| Ownership buyout | Funding a purchase of an owner’s interest | Key person continuity proceeds |
What Do You Need for a Quote?
Prepare the person’s role, ownership share and compensation, relevant business financial information, existing coverage and an explanation of the amount requested. 4Prepare for Individual Underwriting
The application may ask for health and lifestyle information; review answers for accuracy and ask what must happen before coverage takes effect. 2,4| Prepare | How to use it |
|---|---|
| Role, ownership share and compensation | Explain why this person is being discussed |
| Business financial information | Support the amount requested |
| Existing or pending coverage | Identify what is already in force |
| How the amount was estimated | Connect contribution, replacement and downtime |
| Health and lifestyle answers | Review them for accuracy before submission |
| Effective-date conditions | Ask what must happen before coverage takes effect |
Key Terms in Plain English
Beneficiary
The person or entity that receives policy proceeds. For key person protection, confirm the intended benefit to the business. 1,2,4
Term Life
Life coverage for a specified period. Compare the term with how long your business needs protection. 2
Frequently Asked Questions
Does Key Person Life Insurance Cover Disability?
Does the Money Go to the Business or the Family?
Can Key Person Insurance Cover an Employee Who Is Not an Owner?
Yes. A key person can be an employee whose expertise, relationships or responsibilities are difficult to replace, as well as a founder or partner. 1
How Do I Estimate the Amount of Key Person Insurance to Buy?
Estimate the financial effect of losing the person, including their contribution to revenue and the time and expense of recruiting and training a replacement. Use that estimate in the discussion about the amount of insurance. 1
Which Insurance Providers Offer Key person?
Sources
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