What Does Key Person Insurance Mean?
Key person insurance refers to life or critical illness insurance on an individual considered essential to the operations of a business for the purpose protecting the business from the costs and financial handicap resulting from the death or serious illness of the insured person.
In a small- or medium-sized business, a key person is typically an owner/founder, a member of the management team or an employee who cannot be easily replaced and whose loss would be significantly detrimental to the business.
Divestopedia Explains Key Person Insurance
Many privately-owned businesses are dependent on a small set of key people who have top-to-bottom operational knowledge of the business, have established important relationships with customers, suppliers, and other external organizations and/or who dedicate considerable time and energy to the business. These individuals are extremely difficult, if not impossible, to replace without impacting the long-term prospects and value of the company.
The negative impact of losing these 'key persons' might include:
• loss of key customer or supplier relationships
• loss of revenue leading to reduced profit
• operational challenges related to the loss of expertise
• increased financing costs as financial institutions respond to uncertainty created by the loss of the key person
• tightening of credit terms by suppliers.
• incremental costs related to finding and training a replacement
Putting in place key person insurance is a viable means for businesses to protect themselves by transferring these risks to an insurer in the event of an unexpected loss of a key employee.