Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Key Employee

What it is:

Losing key executives, particularly founders, can be very traumatic for companies. Their talent is usually hard to come by, and their roles are often more than just symbolic—in many cases these executives are the "face" of a company. When these executives die, often it interrupts production or throws a big wrench into whatever is going on at the time. Also called key man insurance, key person insurance is insurance an important executive's life. Key person insurance is intended to help companies overcome those hurdles should they occur. In turn, key person insurance can also help companies become more creditworthy.

Accordingly, in our example, while John is busy building and running his new, booming company, the board of directors takes out a key person insurance policy on him. That way, if John dies, the company will receive, say, $10,000,000 and can use that money to find and pay a successor who is hopefully as scientifically competent as John.

How it works (Example):

For example, let's say John Doe discovers a cure for cancer. All the trials show that his new drug formulation kills most tumors in 30 days, but he still has some work to do on building a company around this new patent. He is one of a handful of people who truly understand the science behind the discovery and can ensure its proper production. He is a key employee.

Why it Matters:

A key employee is a founder or an executive who is of exceptional importance to a company.