Insurance Topic
Key Person Insurance
Key person insurance is a life insurance policy owned by a business on a critical individual to mitigate financial loss arising from that individual’s death.
Definition
Key person insurance is a business-owned life insurance policy placed on an individual whose knowledge, leadership, or economic contribution is essential to the operation or financial performance of the organization. The policy provides a death benefit to the business entity upon the insured individual’s death, enabling financial stabilization, continuity planning, or contractual obligations to be met.
Structural Characteristics
- Business entity is the policy owner and beneficiary
- Insured individual is a key employee, executive, or owner
- Death benefit payable to the business upon the insured’s death
- Premiums paid by the business entity
- Policy type may include permanent or term-based structures
- May integrate with business-interruption-insurance considerations
Parameters & Conditions
- Requires insurable interest between the business and the insured individual
- Coverage amount is typically aligned with economic impact or replacement cost
- Subject to underwriting based on the insured individual’s risk profile
- Policy ownership and beneficiary designation must remain with the business entity
- Often coordinated with buy-sell-agreement or succession planning frameworks
Topic Relationships
Exceptions, Limitations & Boundaries
- Does not prevent operational disruption following the loss of a key individual
- Valuation of the key individual’s contribution may be subjective
- Coverage may be insufficient if not periodically reviewed and adjusted
- Policy proceeds are restricted to the business entity, not personal beneficiaries
- Does not replace broader risk management or succession planning strategies
Key Person Insurance: Definitional FAQ
Who owns a key person insurance policy?
The business entity owns the policy and is designated as the beneficiary.
Who is insured under key person insurance?
An individual whose role or contribution is critical to the financial or operational stability of the business.
When is the death benefit paid?
The death benefit is paid to the business upon the death of the insured key individual.
Is key person insurance limited to owners?
No, it may cover employees, executives, or other individuals whose contributions are considered essential.