Key person insurance is an important form of risk management often used by businesses. It is a type of insurance policy taken out by a company on the life of an individual who is critical or essential to the business, such as an owner, a high-level executive, or a head of a special project. It's intended to reduce the financial impact a company would face in the event of the key person's death.

The primary goal of key person insurance is to protect a company's assets and profitability, in the event of the death or disability of a key executive. Companies will use a key person insurance policy to cover costs they may incur in replacing a key individual, such as recruiting and training replacement staff, or the potential decline in profits caused by the loss of a skilled specialist. It can also act as incentive for potential investors, employees and other stakeholders by reassuring them that the company has taken steps to protect itself against the unforeseeable.

After deciding to take out a policy on a key person, the company must determine: • The person or persons to be insured • The amount of insurance coverage • The type of policy—term life insurance, universal life insurance, or a split-dollar policy • Designated beneficiaries • Source of premium payments • The premium rate.

For the most protection, it’s often recommended to obtain key-person insurance and pair it with other relevant specialty lines such as disability insurance, buy-sell agreements and business overhead insurance.

Key person insurance is a useful risk management tool that can help businesses protect their bottom line. By careful assessing their operations and determining the right amount of coverage, potential financial losses can be mitigated and minimized in the event of the untimely death of a key executive.