Key Person Insurance

Posted in Finance, Accounting and Economics Terms, Total Reads: 557

Definition: Key Person Insurance

It is an important type of the business insurance. It does not have any legal definition as such. As its wording suggests, Key Person Insurance is an insurance taken by a business for compensating the financial losses because of the death or an extended inability of an important person for the business. Simply, it is a standard life insurance, trauma insurance or a TPD insurance policy which is used for the business protection or the business succession purposes. The term of the policy is applicable only for the time period of the usefulness of that key person for the business. This insurance is commonly called as the key-man insurance. These Insurance policies are generally owned by the organization. It aims for the compensation of the business for the losses incurred because of the loss of a key income generator in the company and facilitate the business continuity. It does not indemnify the actual loss incurred but it only compensates with a fixed sum of money, specified in the policy.

Most of the businesses have key person responsible for majority of the profits generation or he has a unique or a hard to replace skills such as the intellectual property which is crucial for the business. An employer can take a key-person insurance policy for the life of any employee whose work, knowledge or the overall contribution is uniquely valuable for the business. The employer does this to offset the costs such as recruiting a successor or hiring a temporary help & losses such as an ability of a decreased to transact the business until his successors are trained, which the employer is likely to encounter in an event of a loss of the key person.

As key-man insurance is more of a type of an insurance policy than actual policy, this term is used loosely to include other insurances also which are used for the other business specific purposes like buying or selling of a shareholder insurance, debt protection or a revenue protection.


Hence, this concludes the definition of Key Person Insurance along with its overview.


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