Key man life insurance policy is a policy purchased by businesses which are excessively dependent on a particular person or group of persons for their revenue and profits. In other words, key man life insurance insures a business from the loss of important employees by covering for the damages caused thereby.
The key person life insurance doesn’t protect the key person. It protects the company which has employed the key person. The company owns the insurance policy, pays the premiums for the policy and also gets benefits from the policy. It should be noted that there are no specific tax exemptions offered to businesses which purchase a key man life insurance. The term period of the key man life insurance policy is equal to the time frame when the business is dependent on the key person. This allows better business continuity and gears up companies to face the damages caused by loss of important employees due to accidental death, disability or change in loyalties to a different employer.
A key person for a business can be defined based on several attributes. The key person is usually someone with intrinsic knowledge of the working of the company and the ability to enhance the productivity of operations. A key person could be someone critical for bringing cash funds for the smooth operation of a business. The key person could also be a people manager who can motivate other employees to do their best for the profitability of the business. In short, a key person is anyone with a skill set that only a select few possess. The key person is determined by qualities and strengths that are hard to replace during a particular period.
The key person life insurance policy covers several aspects of a business. It covers for losses faced by a business during the period when new employees are being identified and trained to perform the same functions performed by the key person. This could include technical, management, operational or organizational skills. The insurance also covers losses due to reduction in profits affected by drop in sales and revenues owing to the loss of the key person. Losses of partners and shareholders and also losses of financiers, investors and guaranteeing businesses are covered by the key person life insurance. In case of the disability of the key person, the insurance covers for the losses that hit a business due to the inability of the key person to perform during an extended period of time, when specialized skills aren’t possessed by anyone else at the workplace.
The key person life insurance is part of the business continuation strategy of a company. Small and mid- sized businesses which are overly dependent on certain employees need to plan for scenarios where the services of such employees are not available, either temporarily or permanently. Apart from business continuation, key person life insurance is also important to keep the shareholders’ faith intact and offset the losses caused by drop in revenues or productivity. Sometimes the key person life insurance can also help businesses in providing salaries or other types of remuneration to the disabled employee. The key man life insurance, like any other policy prepares a company for the accidental absence of a key person.