Facts

• Businesses are more likely to suffer the loss of a key person than other commonly known catastrophes. In fact, businesses are 14 times more likely to experience the death of an executive at age 45 than a loss due to fire and 23 more times at age 55, according to the Employment Benefits Administration. Also, one in three employees die during their working years which may have an adverse effect on their employer's business.
  
  

Benefits

• Key person insurance protects businesses from financial loss if employees, who are important to the company’s success, cannot work. Businesses that have key person insurance policies receive the proceeds tax-free as the premiums are paid with after-tax dollars. The money can be used to replace the income lost due to the insured’s absence and also train new employees to fill the vacancy. The money can also be used to buy out the insured’s interest in the company.
  
  

Considerations

• Small businesses typically consider purchasing key person insurance because of the limited number of employees who have important roles in the company’s operations. To be considered a key person, the employee generally is someone who has considerable knowledge of the business, and has important relationships with entities, such as banks, vendors and suppliers. Small business owners and executives in a corporation are examples of key persons.
  
  

Features

• A company is the policy owner of a key person insurance plan. This type of insurance policy is technically a life insurance plan as key persons can be covered by either a term life or permanent life insurance policy. If the policy is a permanent life plan, it can serve as a retirement benefit because of its ability to earn cash value as it matures over time. Key person insurance policies can also be transferred to another employee when the original insured retires.
  
  

Misconceptions

• Although key person insurance can be an important policy that can keep a company from failing, it can also be a major factor in acquiring funds to start a business. Lenders can require small businesses that are applying for loans to purchase a key person insurance policy as a guaranteed form of repayment if something were to happen to the owner which could cause the company to collapse.