Key person insurance is an important form of business insurance. In general, it can be described as an insurance policy taken out by a business to compensate that business for financial losses that would arise from the death of the member of the business specified on the policy.
The policy’s term does not extend beyond the period of the key person’s usefulness to the business. The aim is to compensate the business for losses and facilitate business continuity. Key person insurance does not indemnify the actual losses incurred but compensates with a fixed monetary sum as specified on the insurance policy.
There are 3 categories of loss for which key person insurance can provide compensation:
Insurance to protect profits.
For example, offsetting lost income from lost sales, losses resulting from the delay or cancellation of any business project that the key person was involved in, loss of opportunity to expand, loss of specialized skills or knowledge.
Insurance to protect shareholders or partnership interests.
Typically, this is insurance to enable shareholdings or partnership interests to be purchased by existing shareholders or partners.
Insurance for anyone involved in guaranteeing business loans or banking facilities.
The value of insurance coverage is arranged to equal the value of the guarantee.