the value of key-person life insurance

Most companies have at least one employee who is key to the success of the business. Whether it's the owner, a partner, a majority stockholder, or someone with a high level of expertise, the loss or death of that person could mean financial ruin for the company.

Key-person insurance protects your company's solvency in the event of losing a key employee or founder. Protecting your company from such potential disasters not only makes good business sense, but also, lenders and investors generally require that a business carries key-person insurance to protect their loans and investments in the company.

Many insurance companies require a company's board of directors to pass a resolution affirming the purpose of the business life insurance policy. Additionally, the key employee must be notified about, and agree to the purchase of, insurance on his or her life.

The business typically owns the policy, pays the premiums, and is the beneficiary. Most businesses purchase key-person insurance as a permanent life insurance policy; however, term life insurance may be less expensive and can be bought to cover the key person until he or she retires. The policy can be then transferred to the departing employee as a retirement benefit or to a different key person, upon the retirement of the original key person.

Key-person insurance benefits are often used to buy out the insured person's shares or interest in the company. Buy-sell agreements, which require the deceased executive's estate to sell its stock to the remaining shareholders, legally facilitate this process. Proceeds from key-person insurance can also be used to recruit replacement management.