Key Person Insurance- what is it and who needs it?

 Key person insurance is a life insurance policy that an organisation would want to purchase on a key executive’s life. The company is the beneficiary of the policy and pays for the insurance policy premium. This type of life insurance is also known as business insurance plan in Canada.

So why to buy Key person insurance in Canada?

If a top executive undergoes an accident, is diagnosed with a severe illness or passes away, it could jeopardise the performance or the future of the company. In some small businesses, the key person might be the owner or they might be the only person capable of running the business. In that case it is important to have key person insurance to safeguard the future of the company.

The coverage amount essentially buys the company some time to replace this top executive or take execute alternative strategies to keep the business afloat. The main qualifying point would be that if the person’s absence would impact the company. If this is the case, it’s worth considering the insurance.

So how does the Key Person Insurance work?

For key person insurance policies, a company buy life insurance policy in canada on their key employees, pays the premiums and it is the beneficiary of the policy. In the unfortunate event of an executive's death, the company receives the insurance payoff. These funds can be used to find a replacement, pay off standing debts, distribute money to investors, pay severance to employees or if nothing goes their way close the business in an orderly fashion. In other situations, key person insurance gives the company some options other than bankruptcy.

Who should be considered as a key person?

To determine who needs this kind of coverage, company executives must decide who’s replaceable and who’s not. In many SMEs, without the owner the business would come to a halt.