What is Key Person Life Insurance?

Key Person Insurance is life insurance coverage usually owned by the business on the key individuals within that business. In a small business this individual is normally the owner/cofounder of the business, managing partner, and/or person responsible for the majority of profits. These key people are crucial to the business and without them the business couldn’t thrive. An employer purchases a Life Insurance policy on these individuals to help business continuation.

How it works

The aim of Key Person Insurance is to compensate the business with a specific monetary amount for the losses incurred when a key income generator is lost, in order to continue the business. The business purchases Life Insurance coverage on this key person, pays the premiums, and is named the owner and beneficiary of the coverage. In the event of the key person’s death, the company receives the death benefit which can be used to help keep the business afloat.

How can it protect a business

Life insurance coverage issued on the business’ key person will give the firm access to funds that will help protect the business and keep it running smoothly. Claim benefits can serve to offset the costs of recruiting a replacement and/or losses from decreased business. It would be useful to ask yourself if the key person in your firm—including yourself—were suddenly to pass away, would you or the remaining staff be able to handle the key person’s business contributions along with their own and gain the same amount of profit as the current level of business? Chances are you couldn’t. Upon the death of a key person covered by key person life insurance, the business would have access to funds that would help replace lost revenue or hire a replacement. If the key person is a business partner, these funds would provide a respectable buy-out for the heirs to their portion of the business as well as possibly covering a PR strategy to reassure various stake holders and existing clients.

How much do you need?

When determining the amount of Key Person Life Insurance to purchase, there are a few things to consider. A business should think about how much it would cost to replace this key person and how long it would take to train someone new. They should also look at revenue that will be lost during the replacement process and how much revenue that key person had brought in for the business.
In addition, your firm may want to consider developing a buy-sell or buyout agreement that outlines what is to happen if a co-owner dies or must leave the business. This serves as a sort of business “prenuptial agreement’ between business partners/shareholders. An insured buy-sell agreement is funded with key person life insurance as discussed above and is often recommended by succession experts to help ensure that the plans as outlined in the buy-sell arrangement are adequately funded.

When considering Key Person life insurance and/or a buy-sell arrangement, you should discuss these issues with your legal counsel and your accountants.

Key Person term life insurance is an affordable way to protect your business after the loss of a key person and should be strongly considered as your business develops and grows. Click the button below to view* the AIA Trust Group Term Life Insurance Plan and the AIA Trust Group 10-Year Term Life Insurance Plan that can be used to help protect your business in case of the loss of a key person.

Learn more about term life plans

*Complete details of the plan’s features costs, eligibility, renewability, exclusions and limitations.

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