Key Person Insurance can help businesses protect operations, relationships, and succession plans if a leader is lost. Learn how it fits into overall risk management planning.
Key Person Insurance, sometimes referred to as “key man” or “key woman” insurance, is a type of life or disability policy a business purchases for an essential leader, founder, or specialist. The business owns the policy, pays the premiums, and receives the payout if the individual dies or becomes incapacitated.
When an organization depends on the leadership, expertise, or client relationships of a few individuals, losing one of them can have lasting effects. Key Person Insurance offers a financial resource that can help a company navigate such a loss without making rushed decisions that could impact future growth.
Potential advantages of Key Person Insurance include:
The unexpected loss of a top executive or specialist can disrupt day-to-day operations and revenue flow. A payout from Key Person Insurance can provide funds to cover essential operating expenses, maintain contractual obligations, and keep important projects on track while the company regroups.
This funding can help preserve client relationships and keep teams focused during leadership changes.
Replacing a leader with specialized skills often involves high recruiting costs, relocation expenses, and significant training investments. The proceeds from a Key Person policy can help pay for professional search firms, onboarding programs, and interim staff—buying valuable time to identify the right candidate without rushing the process.
Some lenders require Key Person coverage before approving loans. In the event of a loss, the benefit can help meet outstanding loan terms, fulfill buy-sell agreement funding, or settle debts in an orderly way.
Having the coverage in place can also show investors that the business has measures to address unforeseen leadership changes.
When to Consider Key Person Insurance:
For investors, employees, and business partners, knowing that the company has Key Person coverage can be reassuring. It demonstrates a commitment to planning for the unexpected and maintaining the company’s operational and financial footing even in challenging circumstances.
Key Person Insurance can be structured as term life or permanent life coverage. Term life is generally less expensive and covers a specific number of years, while permanent life has higher premiums but can include a cash value component.
Some policies also offer disability riders, which can provide partial salary replacement if the insured is unable to work due to illness or injury.
Although premiums are typically not tax-deductible, death benefits are generally received tax-free by the business if the necessary consent and filings are completed. It is important to work with a tax professional to understand the rules and maintain compliance.
In closely held or family-owned companies, Key Person Insurance can help provide liquidity to buy out heirs, facilitate ownership transfers, or keep operations running while an estate is settled. This can be a valuable component of a broader succession plan.
Key Person Insurance works best when it’s treated as part of a coordinated business strategy. That means looking at how the policy’s benefits could interact with other elements of your business plan, such as succession timelines, debt repayment schedules, and agreements with investors or partners.
Determining whether Key Person Insurance is the right move can be complex. It requires assessing potential risks and evaluating how that loss would affect operations and revenue. It also means weighing different policy structures, coverage amounts, and premium commitments in the context of the company’s overall financial priorities.
An advisor at EP Wealth can assist by guiding business owners through these considerations, identifying the individuals whose absence would have the greatest operational or financial impact, and helping align coverage with the company’s broader objectives.
This process often includes collaborating with tax and legal professionals to address compliance, ownership structures, and the role the policy will play in funding succession or other strategic initiatives. Contact an advisor near you to discuss your needs.
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