Definition – What is Key Person Insurance?
Key Person Insurance (also known as key man insurance) is a form of business insurance designed to offset financial losses resulting from the unexpected death or illness of a key person.
The key person could be an employee, partner, or owner of the business.
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In exchange for a monthly or annual premium, the policy-holder is paid a fixed sum at the time of the key person’s incapacitation, in accordance with the terms of the policy.
Why do businesses need Key Person Insurance?
Many businesses rely heavily on certain individuals for success and profitability.
An example might be a high-level software developer, or a widely-known spokesperson.
If such an individual unexpectedly dies or is rendered unable to work, the profitability of the business can be directly impacted.
Key Person Insurance protects businesses against these scenarios by providing compensation at the time of death or incapacitation.
Using the payout from the Key Person Insurance policy, the business may be able weather the storm and survive the loss of a key person.
Are there any problems with Key Person Insurance?
Since Key Person Insurance policies are taken out on individuals, the business stands to benefit only so long as the individual is valuable to the business.
If a key person leaves the business and no longer has any value, the business may be stuck paying the premiums.
Ending the policy can involve significant fees, and the business loses the money they have already invested in the policy.
Key Person Insurance is often most relevant to family businesses and other situation in which the risk of the key person leaving the businesses is very low.
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