Key person insurance, also can be called Key Man insurance or Key employee insurance, protects a company in the untimely death, disability or critical illness of the covered “key person”. This is usually a top salesman, executive or business owner or any other employee 'key' to the business.
Key person insurance can provide peace of mind to business owners and shareholders alike, knowing that the business can continue on without any major disruption in the event of a loss of a key executive/employee.
Key Person insurance policies are usually owned by the company/business and aim to compensate the losses that a business may occur in the event of death or disablement. The business sets up a Life Insurance, Total and Permanent Disability Insurance and/or Trauma Insurance policy on the Keyperson and the policy premium can be tax deductible in certain circumstances. The amount of the insurance is determined by the business owners and the receipt of insurance proceeds usually has the desired outcome of allowing the business to continue its operations by funding one or more of the following:
- The loss of revenue the key person would have otherwise generated;
- The additional costs associated with the recruitment and training of a replacement for the key person;
- Replacement of lost goodwill due to the key person’s departure; and/or
- Repayment of debts outstanding at the time of the key person’s departure.