Key Person Insurance (formally called Key Man Insurance) is insurance coverage that the company places on a key employee in order to financially protect the company in case of the unplanned loss of labor (generally from death or disability) of said employee. This insurance is usually provided to executives, business owners or top sales persons.
Although all businesses are dependent on its employees, small businesses are more likely to be heavily dependent on the talent, skills and knowledge of a few people. The loss of such a person can greatly hinder the business operations and/or its ability to attract and retain clients. Key Person Insurance enables to the business to minimize impact created by the loss of the essential employee. It can provide the business with the funds to protect against unexpected death, disability, retirement and termination. The funds can be utilized to hire and train a replacement, as well as, restore lost profits.
The establishment of a plan can also be used to attract talented employees. In addition, it ensures creditors, vendors and customers that the business will continue.