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Does Your Company Need Key Person Insurance?
Author: Scarinci Hollenbeck, LLC
Date: November 21, 2014
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Would your business be able to survive if one of its partners or top executives died suddenly? If you are unsure, you may want to look into “key person” insurance.
While the idea may seem morbid, taking out life insurance and/or disability insurance policies on key employees is more common than many might think. According to the New York Times, hundreds of corporations have taken out life insurance policies on thousands of employees.
Also referred to as key employee or key executive coverage, the policies allow businesses to file insurance claims in the event of the death or disability of individuals who are so vital to the company that their loss could threaten the future of the company. Unlike traditional life or disability insurance, the company pays the policy premiums and is the beneficiary of the policy.
While every business may not have a key visionary like Steve Jobs or Warren Buffett, even small companies could be impacted by the death of a key employee. For instance, what would happen to a successful start-up if the partner who is designing the product or writing the software code died before completing the project? In many cases, the less technical partners might not be able to fill his or her shoes.
Essentially, a “key person” is anyone whose absence would:
- Create a void that could not be easily filled by another employee;
- Disrupt normal business operations;
- Result in the loss of customers or profits;
- Weaken the company’s credit or ability to secure funding; or
- Shake the confidence of the public, business partners, or employees.
In some cases, key person insurance may be required by a contract. For instance, lenders may require coverage to be in place prior to securing business credit. In addition, an acquiring company may consider such insurance to be a prerequisite to the deal.
In regard to how much insurance to purchase, it is important to consider budget as well as how much money your business would need after the death or incapacity of the insured employee. It is also important to keep in mind that investment returns on the policies and any benefits paid may be tax qualified.
If you have questions about this post or would like to discuss key person insurance, please contact me or the Insurance Recovery and Liability attorney with whom you work.
- Practices: Corporate Transactions & Business, Commercial Litigation - Business Litigation Attorney
- Locations: Red Bank, NJ, New York City, Little Falls, NJ
No Aspect of the advertisement has been approved by the Supreme Court. Results may vary depending on your particular facts and legal circumstances.
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