Posted by Ernest P. Valliere
Businesses can’t run without employees. Each individual worker’s role is critical to the success of the entire company. But most companies can handle occasional turnover without major issues. Many positions are easy to fill with qualified replacements after an employee leaves.
However, there are some positions in a company that are not so easy to refill. In some businesses, employees or executives with specialized experience or skills are so critical to the company’s success that their unexpected death could result in sliding stock prices, reduced sales, and decreased company profits. Or the company simply could not run without them. 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 life insurance policy is both the policy owner and the beneficiary, and will pay all premiums. Key person insurance is not meant to pay a benefit to the insured’s family. Instead it puts a monetary value on the potentially catastrophic financial losses that would come as a result of the key person’s death. In short, it is a policy which protects the employing company.
A key person does not have to make a certain income or have a particular title to be considered insurable. 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 his or her death could result in the loss of those relationships.
To learn more about using key person life insurance to protect your business, call SBLI at 1-800-438-7254.