Key-Person Insurance
Key Person Insurance is a life insurance policy that a business takes out on the life of an individual crucial to its operations. This “key person” is typically a founder, executive, top-performing salesperson, or someone with unique skills or knowledge critical to the business’s success.
What is Key-Person Insurance?
Key-Person Insurance is a specialized type of life insurance policy that a business purchases to protect itself against the financial loss that could occur if an essential individual—often called the “key person”—dies or becomes critically disabled. This key individual is someone whose skills, leadership, relationships, or expertise are vital to the company’s continued success and stability.
The “key person” could be:
- A founder who provides strategic vision and leadership.
- A top executive whose management and decision-making directly drive profitability.
- A top-performing salesperson whose client relationships generate significant revenue.
- A specialist or technical expert with rare knowledge critical to the company’s products, operations, or intellectual property.
In a key-person insurance arrangement, the business itself is both the owner and the beneficiary of the policy. The company pays the premiums and, in the event of the key person’s death or qualifying disability, receives the death benefit payout.
The Purposes of Key-Person Insurance
- Financial Protection: The death benefit can provide essential liquidity to cover operational disruptions, replace lost revenue, hire and train a replacement, pay off debts, or even provide severance to employees if the company needs to restructure.
- Business Continuity: Having key-person insurance can give customers, investors, and creditors confidence that the business has a plan in place for unforeseen leadership or talent losses.
- Funding Buy-Sell Agreements: In some cases, key-person Insurance is used alongside buy-sell agreements to facilitate the purchase of a deceased owner’s interest in the company, ensuring a smooth transition of ownership.
- Strengthening Loan and Investment Applications: Lenders and investors often view key-person Insurance as a positive indicator of prudent risk management, which can make it easier to secure financing or investment capital.
How It Works:
- The business purchases a life insurance policy on the key-person and pays the premiums.
- The business is both the policy owner and the beneficiary.
- If the key-person dies or becomes incapacitated, the policy pays a death or disability benefit to the business.
When Businesses Need Key-Person Insurance:
- Startups reliant on a founder or key employee.
- Small to medium-sized businesses with specialized expertise.
- Companies seeking loans or investments.
- Organizations where a key individual has a significant role in revenue generation or strategic direction.
Businesses should periodically review their key-person Insurance policies to ensure the coverage amount remains adequate as the company grows and evolves. Additionally, if the key person leaves the company or the business no longer needs the policy, working with a licensed life settlement company can help convert the policy into valuable cash through a life settlement transaction.
Key-person insurance is a crucial component of a comprehensive risk management and succession planning strategy, helping to safeguard a business’s future against the unpredictable loss of its most vital people.
Selling a key-person insurance policy in a Life Settlement involves a business that no longer needs the policy or finds it too expensive to maintain. Instead of letting the policy lapse or surrendering it for its cash value, the business can sell it through a life settlement for a higher cash payout.
