Key Person Insurance
Key person insurance operates as a life insurance policy for key members of a business’ staff. This includes business owners, top-level employees, and managers. For a financial firm, it might include the partners in a firm or other high-level employees that have important client relationships or very specialized knowledge. Key person insurance serves as a safety net for businesses that lose a critical employee. It helps a company adjust during the period following their death.
The costs following the death of a central employee can be significant for a business. They might include the cost of replacing them or adjusting for a loss of revenue. For example, if a partner at your business dies, you risk losing their clients. This would result in a significant financial loss for your business. Your company needs time and money to restructure and pass clients to other partners. In the meantime, you might also lose money in the form of time. The time it takes to reorganize and restructure means you lose valuable productivity.
Generally, key person insurance is a life insurance policy issued on the life of a partner or key employee of a financial firm but owned by the financial services firm. The firm is the beneficiary of the policy, rather than the partner or key employee, and the firm also pays the premiums for the coverage.
Key person insurance also provides funds for shareholder buyouts from the deceased person’s estate, as well as loans the business may have. If the late employee was an owner and the company fails after their death, it also provides funds to liquidate the business, which can be easier than a disorderly bankruptcy.
Key person insurance does not provide for itemized costs after the death of a key employee. Rather, like any life insurance, it pays an agreed-upon sum stated in a policy. It is not intended to help the dependents of the deceased, like a personal life insurance policy. Rather, it helps companies restructure after the loss of an important figure in their organization.