Does Your Company Have Key Person Insurance?
Definition: Key person insurance (sometimes called “key man insurance”) is a policy that a business takes out on the life (and/or health/disability) of one or more “key persons” whose loss would significantly harm the business. The policy is owned by the business and benefits are paid to the business, not to the employee (or their family). (Gallagher)
Risks it covers:
- Death
- Total and permanent disability (TPD)
- Critical illness/trauma (e.g. heart attack, cancer) (Gallagher)
- Sometimes temporary absence (though that is less common in classic key person policies) (Gallagher)
Purposes / Uses of proceeds:
When a claim succeeds, the business may use the payout for:
- Compensating for lost revenue (sales, contracts, projects) while replacing or recovering from the loss of that person;
- Paying recruitment/training costs to find a replacement;
- Covering debts or liabilities that the key person may have guaranteed;
- Stabilising cash flow;
- Executing a buy-out / adjusting ownership if the key person was a shareholder or partner. (Gallagher)
