What is “Key Employee” Life Insurance?

Sep 17, 2019

By Dan Schulte, Vice President and Manager, Annuities and Insurance

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All businesses, regardless of their size, have key employees that are invaluable to the success of the company.  The death of an individual whose services are important to a business will almost certainly cause considerable losses and costs to the business. For example, some customers or clients with whom the key employee enjoyed a close relationship may choose to not stay with the business, or they may successfully be retained only after expenditure of substantial effort and money. When the death of a key person is unexpected or sudden, it can also create the significant expense of evaluating and ascertaining the status of work projects that may already be in progress, or those not yet started or incomplete, pending negotiations, as well as redirecting other employees within the business to assume new responsibilities.  Additionally, there may be significant costs and commissions associated with searching for, finding, and hiring a successor.  Buying life insurance to protect a business can provide the cash to help a business survive the expenses and losses caused by the death of a key employee and “buy time” until a replacement employee can be found.

When purchasing this type of life insurance, the business is typically listed as the beneficiary of the plan and pays the policy premiums. If the key employee should happen to die, an income tax free lump sum of cash would be paid to the business to help offset the loss of the key employee.    Providing this protection can help assure stability of the business for employees, customers, and creditors if a key employee should happen to pass away.

One thing to keep in mind is that key person life insurance and is designed specifically to protect a business due to death or disability.  These policies are not a substitute for personal life insurance coverage that is designed to protect an individual’s family from the death of a loved one.   Contact your Benjamin F. Edwards financial advisor for a discussion of all your individual and business life insurance needs.