Key Person Insurance
Definition
Key person insurance, also commonly called keyman insurance and key man insurance or 'key employee insurance', is an important form of business insurance. There is no legal definition of "key person insurance". In general, it can be described as an insurance policy taken out by a business to compensate that business for financial losses that would arise from the death or extended incapacity of an important member of the business. To put it simply, key person insurance is a standard life insurance or trauma insurance policy that is used for business succession or business protection purposes. The policy's term does not extend beyond the period of the key person's usefulness to the business. Key person policies are usually owned by the business and the aim is to compensate the business for losses incurred with the loss of a key income generator and facilitate business continuity.
What is 'Key Person Insurance'
A life insurance policy that a company purchases on a key executive's life. The company is the beneficiary of the plan and pays the insurance policy premiums.
Explaining 'Key Person Insurance'
Key person insurance is needed if the sudden loss of a key executive would have a large negative effect on the company's operations. The payout provided from the death of the executive essentially buys the company time to find a new person or to implement other strategies to save the business.
Further Reading
A theoretic analysis of key person insurance
www.sciencedirect.com [PDF]
… Very few papers on key person insurance have been published … (2015) addressed the effects of insurance on firms … In industrial economics, competitive relationships between insurance companies and hospitals are discussed by Wang and Nie (2016), and the factors that affect …
www.sciencedirect.com [PDF]
… Very few papers on key person insurance have been published … (2015) addressed the effects of insurance on firms … In industrial economics, competitive relationships between insurance companies and hospitals are discussed by Wang and Nie (2016), and the factors that affect …
search.informit.com.au [PDF]
… Very few papers on key person insurance have been published … (2015) addressed the effects of insurance on firms … In industrial economics, competitive relationships between insurance companies and hospitals are discussed by Wang and Nie (2016), and the factors that affect …
papers.ssrn.com [PDF]
… Very few papers on key person insurance have been published … (2015) addressed the effects of insurance on firms … In industrial economics, competitive relationships between insurance companies and hospitals are discussed by Wang and Nie (2016), and the factors that affect …
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Q&A About Key Person Insurance
What is key person insurance?
Key person insurance is an important form of business insurance.
What does the term "key person" mean in this context?
In this context, a key person refers to any employee whose knowledge, work or overall contribution is considered uniquely valuable to the company.
Who typically takes out key person policies?
Employers take out key person policies on employees who are responsible for the majority of profits or have unique and hard to replace skills.
How does this type of insurance work?
The payout provided from death essentially buys time for the company to find new people or implement other strategies to save their business.
What are some examples of businesses that need this type of coverage?
Companies with high-risk jobs, such as oil drilling companies, need this type of coverage in case something happens to one of their employees while they're working. This way, they can continue paying them until they find someone else who can do it just as well or better than them.
Why do employers take out key person policies?
Employers take out key person policies to offset costs associated with hiring temporary help or recruiting a substitute when an employee dies or becomes incapacitated.
Who needs key person insurance?
A business needs key person insurance if the sudden loss of a key executive would have a large negative effect on their operations.