While most people associate life insurance policies with individuals trying to prevent financial losses that surround death, some businesses also purchase life insurance. The life insurance policies purchased by businesses are known as "key man" or "key person" life insurance.

Function

Key person life insurance policies provide a death benefit to the business when the person named in the policy dies. The company then uses this money to hire new or temporary help or to supplement sales or income until a replacement is made.

Types of Employees

Key persons for businesses include top-ranking executives, specialists or scientists with advanced degrees or a high level of expertise critical for success of the business, top sales performers who bring in the bulk of a company's incomes and owners or co-owners of the business.

Features

In exchange for the protection provided by key person life insurance, companies pay a premium or fee on a monthly or annual basis. Because of the cost associated with coverage, companies generally limit the number of key person policies they purchase.

Taxation

While key person life insurance premiums are generally not tax deductible, death benefits from these policies are usually not subject to business income tax.

Considerations

Only licensed insurance agents have the ability to sell key person insurance policies, and in most states, life insurance agents are the professionals who sell this coverage. A licensed agent helps businesses determine which employees are "key" and how much coverage is needed to adequately protect the business.

Source:

Insurance Information Institute: Key Person Insurance

Insurance Information Institute: Can I unsure the Life of a Key Person?

MEG Financial: What is Key Man Insurance?