Key Person insurance is often called Key Man insurance or Keyman coverage. It is a policy taken out by a business to allow compensation for financial losses resulting from the incapacity or death of an important employee. Although there is no legal definition for it, Key Person insurance is an important type of business coverage. Another purpose of this coverage is to contribute to the continuity of the company. A policy’s term does not exceed the point of the key individual’s usefulness. Although this coverage does not indemnify actual losses, it does provide a fixed sum. The exact sum is specified in the policy’s verbiage.
Employers may obtain Key Person insurance for the health or life of a worker contributing special skills, knowledge or other contributions. To be considered for such coverage, a worker’s contribution to the company must be uniquely valuable or consume a considerable portion of the company’s worth. Employers obtain this coverage to offset the costs associated with losing the employee. Expenses such as hiring successors, decreases in business and training temporary workers are all important considerations for employers.
Who Qualifies as a Key Person. Anyone who is associated directly with the business may be considered a key person. In addition to this, individuals whose loss could result in serious financial strain usually qualify. For example, company directors, key salespersons, partners, key project managers or other valuable individuals with unique skills normally qualify.
Loss Categories for Key Person Insurance. For Key Person insurance compensation, there are four separate categories:
- Insurance for protection of partnership interests and shareholders. As a rule, this type of coverage enables partnership interests or shareholdings that current partners or shareholders will buy.
- Losses connected to the period when the key person cannot work, when temporary personnel must be provided and when it is necessary to pay for training and recruiting an adequate replacement.
- Insurance for any parties involved in guaranteeing banking facilities or business loans. The value of the guarantee equals the value of the insurance coverage.
- Insurance for profit protection. Some examples include offsetting lost income from cancellation of a business project the key person was involved in, lost sales or losses from delays. There are also several other types of losses.
The treatment of funds received and tax rules for premiums paid for key person coverage vary. In the United States, premiums are not tax deductible. To learn more about Key Person coverage, discuss the options with one of our agents.