Definition: Life insurance on a key employee, partner or proprietor on whom the continued successful operation of a business depends. The business is the beneficiary under the policy.
Key Man/Person Insurance is a life insurance policy taken out by a company on the life of an individual that could cause irreparable damage to the organization in the event of their death. This could be the owner, a top sales person or other key personnel without whom the business would almost certainly fail.
It works the same as any other life policy with the exception that it is a company that has the insurable interest rather than an individual. E.g. A company purchases a life insurance policy on its key employee(s), pays the premiums and is the beneficiary of the policy. If that person unexpectedly dies, the company receives the insurance payoff. This payout can then be used to fund expenses until it can find a replacement person, or, if necessary, pay off debts, distribute money to investors, pay severance to employees or even close the business down in an orderly manner. It really just gives the company a greater number of options, rather than immediate bankruptcy.
This is not a personal insurance to help protect the family, that would have to be set up separately, but it can make the difference between a small company continuing to operate or closing its doors.
Each partner takes out an own life policy for the value of their interest. This policy is written on a specified term basis or until retirement age. Each policy is then held under a business trust for the benefit of the remaining partners. If a partner dies or becomes critically ill, the partners use the funds from the trust to buy the partnership interest from the deceased/ill partner’s estate.
Each partner assigns their policy when it is set up and is known as the ‘settler’ of the trust they have created. The settler is automatically a trustee and the additional trustees will usually be all or some of the remaining partners in the arrangement.
It is recommended that some form of legal agreement is put in place which ensures that the proceeds of the policy are used to buy the deceased/ill partner’s share and that the deceased/ill partner’s legal representatives will sell the shares to the remaining partners. A cross option agreement or buy and sell agreement is preferable for this purpose.
This is all over come if dealt with now. Call one of our Key Man specialists who will advise you on the most suitable policy.