Key Person Insurance

What Is Key Person Insurance?
Nearly every business has key employees who are critical to the overall success and profitability of the business. Key person insurance is used to reimburse an employer for the economic loss caused by the death or disability of key employees. The insurance can also provide funds to attract and replace the deceased or disabled individual. Good business planning dictates the need to provide adequate insurance to protect against loss of tangible assets such as buildings, inventory, and equipment. Good business planning should also recognize the needs to insure intangible assets, which are important to the success of the business; the most important asset of any business is its KEY people. Every successful business has at least one man or woman who is a key person–a profit maker.

How Key Employee Insurance Works:
This is a relatively easy form of business insurance planning. The following bullet points will walk you through the process.

  • Determine who your key employees are –A typical key employee is anyone who would have a substantial impact on the financial success of a business should that person die or become disabled.
  • Key Person Valuation–There are two basic ways to determine the amount of key person insurance, the first is the contribution to earnings and the second is the cost to replace the key person with an employee with equal experience.
  • Apply for coverage–The employer applies for, owns and is the beneficiary of the insurance policy on the key employee.
  • For the employee–It the key employee lives to retirement age, the policy will buildup cash that can be used as a deferred compensation agreement (minus premiums paid by the employer) to reward the employee for his or her loyalty.