Life cover is the financial protection every family needs against the death of a breadwinner while disability insurance and dread disease cover protect against the disability or illnesses of a breadwinner. But did you know that businesses can also insure the life and health of a valuable employee? Read on to find out more about key person insurance.
Wikipedia defines key person insurance, or keyman insurance, as ‘insurance taken out by a business to compensate that business for financial losses that would arise from the death or extended incapacity of an important member of the business.’ It goes on to say that ‘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.’
A key person insurance policy could be a life cover policy to protect against the death of a key employee or a disability insurance or dread disease cover policy to protect against the disability or illness of a key employee. It is important to remember that key person insurance will not cover actual losses incurred by the business as a result of the death or illness of an employee but rather pay-out a specified amount as detailed in the insurance policy.
Employees covered by key person insurance could range from senior sales managers and project managers to directors and board members.
Consider the following scenarios:
A company’s sales director falls ill and is off work for three months. For those three months sales figures will likely drop. A dread disease policy in that sales director’s name would cover these losses
A company’s managing director passes away. A life insurance policy in his/her name will cover the cost of recruiting and training a successor
A senior project manager falls ill and is off work for two months. A dread disease policy in that person’s name would cover the costs of hiring a temporary project manager for those two months
A senior sales person is disabled in