Understanding Key Person Insurance

Your business could be severely affected if it was to lose a key person due to illness, injury, or death. This is especially the case if that person has a very specific set of skills and holds an important position in your company. Losing that person could lead to significant losses since you may have to put some of your operations on hold while you are looking for a successor. The good thing is that you can protect your business when this happens through what is called Key Person Insurance.

How It Works

In this type of insurance, a key person in the organization is insured, which could be a founding partner, an executive, or just about any person who holds a position vital to the company's existence. In case of that person's death, illness, or injury, the business will be able to claim on the insurance.

Using the Insurance

Once claimed, the funds can be used for a variety of purposes related to the company's operations or in ensuring a smooth transition after the key person's departure. These include:

  • Looking for and training a replacement for the key person
  • Hiring a person to fill in the vacancy temporarily
  • Paying debts and severance pay to employees, and distributing the funds to investors in case of bankruptcy due to the loss of the key person
  • Purchasing shares from the family of the key person in case of death

Determining Your Needs

Does your business need to have this type of insurance? If you have personnel who are important to the existence and operations of the company, then you will most likely need to have Key Person Insurance. It also applies to small businesses with partnerships. This type of insurance protects the company when a key partner dies or becomes incapacitated.

Unlike life insurance, Key Person Insurance is designed to protect businesses rather than individuals. Because of this, premiums for Key Person Insurance are generally higher to reflect higher payouts come claim time. Payouts generally range from $500,000 to $10 million. The actual insurance you will receive depends on a number of factors, including the person being insured and the type and size of your business. All of this is agreed upon at the time of setting up the insurance.

In summary, as long as you have persons important to your business, it is worth getting them insured with Key Person Insurance. Key person insurance can be a little complicated, so be sure to speak to a Rate Detective advisor to help guide you through the process. Our advisors will compare products from the top 9 insurance companies to provide you with the best value in terms of price and service from our panel of insurance companies.

This information has been prepared by Rate Detective and does not take into account your objectives, financial situation or needs. Before acting on this information you should consider whether it is appropriate to your situation. We recommend you obtain financial, legal and taxation advice before making any financial investment decision

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Published on September 9-th, 2012 in Insurance
Damon Rasheed is the CEO of Rate Detective, an Australian financial service comparison sites specialising in Life Insurance, Income Protection Insurance and home loans. Damon holds a Master's Degree in Economics from the University of Melbourne and has been involved in many start-up internet businesses.

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