Key person insurance – definition and meaning

Key person insurance is life insurance of a key person in a company. We also call it key employee coveragekeyman (or key man) insurance or key person protection. Businesses have this type of insurance to protect themselves against financial losses if a key person leaves. The insurance may offer coverage for life, critical illness, or disability. In fact, some policies cover all three.

A key person or key employee is somebody who works in a company and has an important role. They may have an important decision-making or ownership role in the business. Some may have voting rights.

When a key employee leaves, the effect may be devastating for the company. In fact, the key person’s absence may bring down the whole business.

Put simply; the key person is vital for the company’s financial and commercial well-being.

Wikipedia has the following definition of key person insurance:

“An insurance policy taken out by a business to compensate that business for financial losses that would arise from the death or extended incapacity of an important member of the business.”

Key person insurance
For some companies, key person insurance may mean the difference between commercial life and death.

Key person insurance – a safeguard

When a key employee in a company dies, it can have a damaging financial effect. In fact, sometimes the event can be completely devastating.

Companies can help safeguard their business against the critical or terminal illness, disability, or death of a key person. They can do this with key person insurance.

At Legal & General, for example, an insurance company, the policy is a life assurance or life assurance and critical illness cover policy. The company takes it out to cover the life of a key employee within the business.

Legal & General calls it key person protection. The employer owns the policy and pays the premiums. Therefore, any payout goes to the employer.

Regarding the loss of a key employee, Legal & General says:

“The loss of a key person in your business could have a severe impact. The business could suffer badly, with sales and profits falling and increased workloads for the remaining staff.”

During the length of the policy, the employer receives a lump sum on the death of the key employee. The purpose of the lump sum is simply to help the company recover.

The employer can use the proceeds to recruit and train a replacement. It can also use the money to help replace lost profit.

Regarding the type of company that takes out a key person insurance policy, Zurich Insurance Group says:

“This kind of life insurance is taken out by a company of any size, where there is a need to protect against the loss of an extremely valued employee of high financial or strategic importance to the business.”

Video – Key Person Insurance

This Oviso Money video explains what key person insurance is and what a key employee is. It also explains why this type of insurance is important and what the benefits are.