Key person insurance is an important form of business insurance where a policy is taken out by a company to compensate for financial losses that would arise from the death or extended incapacity of the executive specified on the policy. Generally, the policy’s term does not extend beyond the period of the key person’s usefulness to the business. The intention is to compensate the business for losses and facilitate business continuity.
An employer may take out a key person insurance policy on the life or health of any employee whose knowledge, work, or overall contribution is considered uniquely valuable to the company. The employer does this to offset the costs (such as hiring temporary help or recruiting a successor) and losses (such as a decreased ability to transact business until successors are trained) which the employer is likely to suffer in the event of the loss of a key person.