You must be aware that a life insurance policy can provide the necessary financial protection to your dependents in the event of your death.

But do you know that a term life insurance policy can also help to keep the company running smoothly in the event of the death of a key member of your leadership team?

Such a life insurance policy is called key person life insurance or key person insurance and it can provide an income tax–free death benefit when they’re needed most during transitions in your company.

Key Person Insurance is a life insurance policy that a company purchases on a key executive’s life. The company is the beneficiary of the plan and pays the insurance policy premiums. This type of life insurance is also known as “key man insurance,” “key woman insurance” or “business life insurance.”

Who is a key person in your business?

If you’re a business owner, it’s natural that you care about all your employees and would want the best for them. But there are certain employees whose absence can affect your business operations directly.

This person might be handling the operations, managing your profits, or is a business partner. So for your company, this individual becomes the key person.

How key-person insurance works with a term life insurance policy

A key-person life insurance is a term life insurance policy that provides cash to meet outstanding debts and maintain business continuity.

As a company, you need to obtain the key employee’s written consent and follow the formalities necessary to approve the purchase of the key person life insurance policy.

In any case, the company or the business pays all the premiums and is the beneficiary of insurance on the key employee’s life.

Thus if the key employee dies, the company receives the policy benefits to cover losses and find and train a replacement.

After the business files a claim following the death of the key person, the life insurance carrier will pay the policy benefit income tax-free to the business.

Then the business can use the benefit to replace lost earnings, provide a financial cushion, recruit and hire a qualified replacement, make survivor income payments to the key person’s family, etc.

Death is unpredictable and you can’t be overly dependent on your current cash flow to sustain your business in the event of a key person’s death.

Buying key person life insurance means you’ll have the necessary financial assets available at crucial times. Thus consult an agent, do thorough online research, and apply for such a policy to put your mind at ease.

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