Key person insurance is less known to many but it is perhaps one of the most important life insurance products that can help protect your business interests. Also known as the key man insurance, the key person insurance provides business owners some form of security by providing insurance coverage to their employees. In order to appreciate this type of life insurance product, it is important to understand the features and benefits it provides among business owners.

What is a Key Person Insurance?

Key person insurance provides coverage for business owners and/or a key employee insurance coverage upon which the beneficiary is the business itself, rather than the owner of the business. This is a specialised form of insurance plan that most investors require from a business prior to placing their investment. Indeed, the key person insurance provides a safety net to a business against an uncertain future in a proactive way. Most prudent business owners will find this type of insurance plan a wise investment as it protects their financial business interest should anything happen to their key employees.

The key persons to be insured under this type of insurance plan are those who are closely associated with the business. Because key persons have some degree of influence how a business operates and perform, their loss could cause significant detrimental effect to the business. The persons covered in the key person insurance may be the company president or Board of Director, an important key sales person, project managers, top level managers and supervisors, a business partner or employees whose skills and services are valuable to the business operation. A significant feature of the key person insurance is giving protection to your business and not to your key employees.

What Makes Key Person Insurance Important

The importance of the key person insurance cannot be underemphasised. Its significance in business is providing protection to the assets of a business derived from its people and their services. If employees performing vital responsibilities and duties for a business will suffer from illness for instance, their non-performance of duties may impose significant loss to the business profits. Businesses usually rely upon their people and it is customary to consider employees as major assets of a company or organisation. A key employee who is ill or suffering from accident or injury can cause delay in the business operation which could translate to profit losses.

You want to ensure that your business is protected against this kind of eventualities. While most employers provide life insurance benefits to their employees, their business remains unprotected in case key personnel of their business experience unfortunate conditions that render them incapable to perform their vital duties at work.

Key person insurance is the best way to derive some source of protection for your business. The losses a business owner may sustain owing to the sickness or unfortunate demise of their key employees will be fairly compensated by the benefits they can claim from their key person insurance policy. This means that their business will remain afloat against losses in case their business operations become affected in the event a key employee is unable to do profitable undertakings under unexpected circumstances like disability, sickness or death.

The Benefits of Key Person Insurance

While key person insurance does not replace the valuable persons in your business, you will be protected against complete financial loss. This means that you can maintain business continuity despite the absence of the key person of your business because your potential losses will be compensated by your insurance plan. Generally speaking, the main benefit you can enjoy from this type of life insurance product is being compensated for the losses you might incur from your business operation in case a valuable person of your organisation dies or suffer from incapacity to work. The insurance plan does not indemnify the actual losses your business might suffer but provides a fixed monetary compensation in the amount specified on your insurance policy.

In the event of an untimely loss of an important employee, it is possible that your business will experience loss of critical management skill resulting in the reduction of the productivity of your business. The insurance benefit you can claim from your key person insurance can be used to cover expenses for training new employee in replacement of the key person of your business. You will be protected against unnecessary expenses and losses incurred by losing one or more employee assets of your organisation.

You need to weigh the risks your business may be subjected to when you lose a very important person that is valuable to your company undertakings. Just like a life insurance policy which aims to provide security and protection to you and your family, the key person insurance provides the same security against risks to your business. The cost of premiums you pay for a key person insurance plan may prove to be less than the benefits you can claim in case a key person dies or suffers disability that can affect your business operation, management and profit.

There are four instances upon which you can claim compensation from your key person insurance benefits:

• First, you can offset the benefit for paying temporary personnel in the event a key person of your business is unable to work and paying for the necessary expenses for the recruitment and training process.
• Second, you can also use the insurance benefit to cover for lost sales and other forms of income loss owing to the delay or cancellation of projects managed by the key person of your business or the loss of opportunity to do business due to lack of personnel with specialized skills to work on a project.
• Third, the insurance plan provides protection to the partnership interest and also to its investors and shareholders.
• Lastly, a key person insurance coverage provides guaranteed business loans from banking agencies.

There are many purposes and benefits that can be derived from key person insurance. Your business will receive convenient financial sources to cover for expenses and replacement of a key employee and in covering short term revenue deficits of your business.