Business Life Insurance – Key Person Insurance

UPDATED: Feb 25, 2020

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There are four main types of business life insurance, and we will discuss each in this week’s blogs. Today we will profile Key Person life insurance.

Key person life insurance is intended to protect a company in the event of a key employee’s death. Such an event could create a financial hardship for the company. Proceeds from a key person policy could be used to assist with the replacement of the employee, which may include expenses such as recruitment and training.  Policy proceeds may also help replace lost earnings, customer accounts and lines of credit among other things.

The company is typically both the policy owner and the beneficiary of the policy.  Insurance companies will usually consider a multiple of the employee’s annual compensation in determining the amount of coverage they will issue. Guidelines vary by company, but a good rule of thumb is 5-10 times the employee’s salary.

Often the actual loss to the business cannot be measured by an employee’s salary. Therefore, it is important to communicate to the insurance company any intangibles present such as key contacts or key accounts this employee had. Such intangibles may give the insurance company enough justification to stretch their guidelines a bit.

Please contact us with any questions you have regarding key person term life insurance.

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