Understanding Key Person Insurance

Key person insurance is a type of business insurance that a company can take out on an individual. This type of insurance is very important for many different businesses because it can cover several different types of losses. Many businesses rely on the ability of a single person to continue working. If that key person is incapacitated, the business could suffer substantially. Many times, the founder of a business or someone who plays a vital role in the operation of the business, can make such a big difference for the company that it would potentially go out of business if that person died. With this risk in mind, key person insurance was created.

Anyone that the business deems as important enough could have a key person insurance policy taken out on them. When a business takes out this type of insurance policy on an individual, the business has to notify the person in writing. 

Making Up For Losses

The idea behind this type of insurance policy is that it will help make up for losses that are caused when an important person cannot perform their duties. This type of policy could cover the business when the individual gets sick or becomes disabled and is unable to work for an extended period of time. This policy can also kick in when the individual passes away. Instead of paying the company back for a certain amount of lost profit, it will provide the company with a fixed benefit that is determined in advance. This is very similar to traditional life insurance that pays a specific amount of money based on the face value of the policy. 

Insurable Losses

There are four different types of insurable losses that key person insurance will pay for. If a key person is unable to work for an extended period of time, the insurance company will pay a certain amount of money to find a temporary replacement. It could also pay to train someone to take over the responsibilities.

Another type of insurable loss involves the insurance company paying to protect profits. If it is determined that the business lost potential profits from expansion or from a lack of sales, they can collect from the insurance company a certain amount of money.

Another insurable loss involves protecting the shareholders of a business. For example, if an individual pass away, the insurance can pay the partners a certain amount of money so that the partners can purchase the remaining portion of the business from the deceased individuals family. If an individual is in charge of guaranteeing a business loan, they can also be covered by key person insurance. In fact, this type of insurance might be required by lenders when a loan is taken out by a company. 

blog comments powered by Disqus