key person life insurance

Everything You Need to Know About Key Person Life Insurance

July 9, 2021

Most companies, especially small or very new businesses, have a critical employee without whom the business would not function. Sometimes it's the founder, owner, a top executive, or maybe even a top salesperson. Some businesses choose to protect the business against the loss of this individual by purchasing key person insurance. This specialized life insurance policy can be designed with a death benefit to the company.

How Does It Work?

The company pays the premiums and is the beneficiary of key person insurance, also known as "key man insurance," "key woman insurance," or "business life insurance." In the event of the insured employee's death, this specialized life insurance policy is designed to buy time for the company to find a replacement or strategize to save the business.

Do You Need It?

To determine the necessity of this type of insurance, business leaders must evaluate the corporate structure and determine who, if anyone, would be irreplaceable in the short term. For many small businesses, the owner conducts most of the operations, such as bookkeeping, staffing, office management, and customer relations. Without this individual, the business would suffer or even cease.

The death benefit from a key person policy can be used for recruiting, hiring and training an employee to replace the deceased. If the remaining leaders determine that operations cannot continue after the key person's death, the money can pay debts, go to investors, provide severance to laid-off employees, and provide structure for the closing of the business.

What Risks Are Covered?

Key person policies can insure a company against a variety of risks, such as:

  • Offsetting lost income resulting from delayed or cancelled transactions that the key person was involved in.
  • Protecting shareholders or partners by enabling them to purchase the deceased individual's financial interests.
  • Insuring those involved in guaranteeing loans or banking facilities.

What is the Cost?

How much insurance you need depends on the size of the company, type of business, and the critical employee's role. You should ask for quotes on a variety of values ranging from $100,000 to $1 million and compare the costs. The costs will vary by company, but will also depend on the following variables:

  • Term life policies are almost always less expensive than permanent life policies. Term life insurance, also known as pure life insurance, guarantees a death benefit if the covered individual expires during a specific time period. Permanent policies, including whole and universal, offer coverage for the individual's entire lifetime and accumulate cash value.
  • Cost of the coverage will depend on the key person's age, overall health, and other risk factors, just like any other life insurance policy.

Key person insurance is not for every business. However, for those whose successful operations depend on one or two critical individuals, it makes the worst case scenario survivable.

About 1891 Financial Life

At 1891 Financial Life, we don’t just sell policies, we offer possibilities. We pride ourselves on giving back to the communities that we serve by providing quality and comprehensive insurance solutions. We are a not-for-profit life insurance Society, which means the sales from these financial service products help us to continue the good works that we do in the community. 

Our mission is to provide products and benefits that assist individuals and their families in achieving financial security, while helping to build strong communities by supporting volunteer programs that reflect common shared values. In 2023, 1891 Financial Life was listed by Forbes as one of "The World's Best Life Insurance Companies."