Key Person Insurance

A life insurance policy that a company purchases on company's key executive's life.

Investopedia Says:
The company is the beneficiary of the plan and therefore pays the insurance policy premiums. Key person insurance is needed if the sudden loss of a key executive would have a large negative effect on the company's operations. The payout provided from the death of the executive essentially buys the company time to find a new person or to implement other strategies to save the business.

Also known as Key Man Insurance, Key Woman Insurance, or Business Life Insurance.

Also called Key Man (Or Woman) Insurance. Life insurance bought by a company, usually a small business, on the life of a key executive, with the company as beneficiary.

Life insurance and long-term disability income insurance on major employees, with benefits payable to the business. Key person insurance has these advantages: (1) enhances the ability of the business to continue operations; (2) fosters smooth sale of a going business between an estate and a purchaser by providing funds to buy out the interest of a deceased key person; (3) encourages key employees to stay on the job; (4) attracts new key employees;

(5) provides funds for expenses of hiring and training of a replacement key employee; (6) provides a line of credit (A permanent life insurance policy has cash values that are available for loans at advantageous rates.); (7) policy proceeds, which are income free, are payable even if the key person is no longer in the employ of the business at the time of death; however, the business must continue to make the premium payments after the key person leaves the employment; (8) a life

insurance policy can be surrendered for its cash value or sold to the insured key person; thus, the business will usually at least receive

the return of premiums; (9) long-term disability income insurance on a key person also provides funds for salary continuation to the disabled key person. (For temporary disability, the business might prefer to self insure because the expense of premiums for this coverage is generally excessive when compared with the potential income

benefits.)

Insurance policy protecting a small business or partnership against business losses from the death or disability of a principal owner. Lenders sometimes require partnerships or closely held corporations to take out such insurance naming the lender as loss payee before extending credit if they believe the loss of a key employee will hinder a firm's ability to repay a bank loan.