Key Person Insurance

The Concept

• Business protection: Key person life insurance helps reimburse a business for economic loss when a key employee dies.
• Coverage focus: The policy covers the life of an employee who is critical to the success and profitability of the business.
• Risk strategy: Key person insurance is not a specific type of policy. It is a way to use life insurance to help offset a business risk.

The Rationale

A key employee is typically a person whose contributions are difficult to replace and whose absence could create meaningful financial strain. In many cases, a key employee is highly compensated, helps drive management decisions, impacts sales, and maintains important relationships with customers and creditors. A key employee may or may not be an owner.

How a Business Can Be Impacted

A business can suffer significant disruption after the death of a key employee. Potential impacts may include:

• Loss of leadership: Loss of management skill, experience, and decision making capacity.
• Operational disruption: Interruptions in sales, production, or service delivery.
• Missed opportunities: Delays or lost momentum in key projects and growth initiatives.
• Credit difficulties: Challenges making payments or reluctance by creditors to extend credit.
• Replacement expenses: Increased costs to recruit, hire, and train a qualified replacement.