Key Employee

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.