What is key person insurance?

Key person insurance (sometimes known as key man insurance or key employee insurance) is insurance a business buys on the life or health of an owner or employee who is essential to the success of the business.   

There are 3 types of key person insurance:

• Life insurance

  Let’s say you purchase a key person life insurance policy for your important sales manager. If they died, the life insurance proceeds would help you meet financial objectives in their absence and pay for hiring and training a replacement.

• Critical illness insurance

  With key person critical illness insurance, if your sales manager has an illness covered by the policy, it will pay a lump sum to your business to help cover financial losses or lower productivity from that person being away from work.

• Disability insurance

  Key person disability insurance can benefit your business 2 ways. If your sales manager becomes disabled, it can help you to continue providing them with a salary until age 65 or they recover, whichever comes first. It can also help you continue paying office expenses and salaries during the time of the disability.

How key person insurance can protect a business

The right insurance coverage can help you:

• Protect your business, if you or a key employee is suddenly unable to work

• Secure or pay off a business loan (known as collateral assignment)

• Provide you or your business partner with money to help buy the other person’s share of the business, if 1 of you is leaving. While there are different ways to arrange funding, life insurance is often the most cost-effective, straightforward, and secure method.

• Cover expenses for you or your family if 1 of you is leaving

What is the collateral assignment?

Not only can life insurance help protect your business, it can also help your business borrow money. 

Sometimes when your business starts out, it may not have the assets traditionally used to back a loan. 

With the collateral assignment, a company makes a third-party lender the primary beneficiary of a corporately-owned life insurance policy used as collateral for a business loan or line of credit from that third-party lender. 

When you use collateral assignment of a life insurance policy, you designate that during the life of the loan, the lender can collect some or all of the policy. And if something happens to you before the loan is repaid, the lender can claim your policy.

The need for personal insurance as well

If you’re a business owner, having key person insurance is important. But there are great reasons to also have personal life insurance.