Key-Man Life Insurance
When key-man life insurance is purchased, a company buys a life insurance policy on a fundamentally important employee. The company pays the policy premiums and designates itself as the beneficiary of the policy. Should that person die during the term of the policy, the company collects the insurance proceeds. It operates as a form of business protection insurance, and provides a company with a cash infusion during a critical period of flux and transition. It's ordinarily purchased by smaller companies and firms, although it's also available for larger entities.
Who It's For
The coverage is ordinarily targeted for pivotal personnel in smaller companies who might be irreplaceable. The insured person might be the founder, majority shareholder, a partner or another individual in the company that has specific and unique knowledge and skills. They're the rainmakers. The death of that key person can also result in the demise of the company itself. Although some key-man insurance policies provide only for sudden or accidental death of the insured person, most provide coverage if death results from terminal illness.
Although it's characterized as life insurance, there are generally four types of losses that key-man life insurance covers. They include protection of the deceased's shareholder or partnership interests. Any loans that the deceased personally guaranteed might also be covered. Most key-man life insurance policies also have one form or another of disability insurance. Each policy must be examined to determine who the beneficiary might be under the disability portion of the policy as that beneficiary might be entirely different than on the life coverage.
Like any other life insurance beneficiary, the company can use the proceeds of the key-man life insurance policy in any way that it chooses. It might use the proceeds to fund itself until such time as a satisfactory replacement is brought in. It might extinguish debt, pay investors or even use the money to wind up the affairs of the business.
Every business should determine whether it needs key-man life insurance for business protection. Without it, after the death of the key-man, the involuntary death of the company could shortly follow.