What is Key Person Insurance?

SBLI of Massachusetts

December 15, 2010

Businesses simply cannot run without employees. When you consider large grocery stores with their baggers, cashiers, human resource departments, shelf stockers and many other employees, you can see how important each individual worker is to the success of the entire company. Most companies can handle occasional turnover without bringing the business to its knees. Many positions are easily filled with qualified replacements a very short time after the former employee leaves.

There are some positions in a company that are not so easily re-filled. In some businesses, executives with specialized experience, a head full of ideas, and unmatched leadership skills are not only devastating to lose by something as sudden as death, but whose loss could also result in sliding stock prices, reduced sales, and decreased company profits. These employees and executives are considered key persons.

Key person insurance is a life insurance policy that pays out a death benefit in the event of the key person’s death. The company purchasing the insurance policy will be set up as both policy owner and beneficiary and will pay all premiums. Key person insurance is not meant to pay out a benefit to the insured’s family, but instead is designed to put a monetary value on the potentially catastrophic financial losses that would come as a result of the insured’s death. In short, it is a policy designed to protect the employing company.

A key person does not have to make a certain income or have a certain title in order to be considered an insurable key person. In order to prove an insurable interest in the key person, the company must illustrate how the key person’s death would cause a significant financial impact by presenting the intellectual, public relations, or other importance of the employee. For example, a designer of a new video game could be considered a key person because of the intellectual property the company would lose in the event of his or her death. The client liaison to a large consulting firm may also be considered a key person if he or she handled the majority of the client relationships and their death could result in the loss of those relationships.