There are much confusion in online forums, Q&A sites, and other online discussion platforms about different types of corporate/business-related insurances, with key person insurance being one. While many facts about key person insurance available online are true, some aren’t. In this article, we separate facts from misconceptions to help you gain a complete understanding of the insurance and how it can be beneficial under several circumstances. All of the following are true of key person insurance except the misconception that it is designed for everybody.
Purpose of key person insurance
Key person insurance, or also called keyman insurance, is a type of life insurance. But unlike the latter, key person insurance isn’t designed for everybody. This leads to the important question: what is the purpose of key person insurance?
In almost all cases, the main purpose of key person insurance is to help organizations/businesses in terms of finance if the key person passes away. In other words, the insurance is designed for the key person of the organization/company. The key person can be the CEO, the owner and/or the founder, the shareholder, are the key executive of the company.
The financial benefit that the insurance offers, in the event of the demise of the key person, helps companies steer clear from risks such as disruption in the operation. Unlike other types of life insurance, Key person insurance requires the employer to be both the premium payer and the proposer of the policy.
Also, it is important to note that not all companies/organizations are eligible for taking key person insurance policies. Companies that are making losses or on the verge of losses aren't usually eligible for the insurance.
Why would a business owner choose key person insurance
As mentioned above, Key person insurance is intended to protect businesses against financial challenges that may occur in the event of the death of the key person. So, the main reason why a business owner would choose key person insurance is to safeguard his/her company from finance-related risks which can affect operations and eventually the fate of the company.
Key person insurance policies are especially well-suited for small and medium-sized businesses as they may not have the size of financial backup that is required to ensure that the operation is on the right track if the unfortunate happens and the key person of the company dies.
Types of key person insurance
Not every key person insurance policy is the same. There are different types of policies available for businesses of all types and sizes. Also, some policies are modified or can be modified to best meet the specific needs of several businesses. Some of the different types of key person insurance policies include:
1) Income protection key person insurance
It is one of the less common types of key insurance policies several businesses choose. The basic concept of this policy is to pay out monthly amounts as income to the company if the key person, who is insured in the policy, dies during the policy tenure.
2) Term life key person insurance
This type of key person insurance is completely designed to function as a standard term life insurance. One of the main factors that make term life key person insurance different from regular term life insurance is the shorter policy period.
3) Critical illness key person insurance
This type of key person insurance policy is similar to regular critical illness insurance policies. It is specifically designed to pay out if the key person who is insured in the policy is diagnosed with a life-threatening disease. Critical illness key person insurance typically pays out a lump sum.
4) Disability key person insurance
As the name itself suggests, disability key person insurance is designed to pay out if the insured key person suffers a long-term disability. The types of disability covered can vary from one insurance policy to another. This type of key person insurance may either pay out in the form of monthly income or a lump sum amount.