What is Key Person Insurance?

Also called key man insurance, key person insurance is insurance on an important executive's life.

How Does Key Person Insurance Work?

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. Accordingly, 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 million and can use that money to find and pay a successor who is hopefully as scientifically competent as John.

Why Does Key Person Insurance Matter?

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. 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.