Most companies or small businesses have at least one employee who is crucial to the success of the business. That person can be a top salesperson, the owner, a partner or someone who controls the day-to-day operations. But the loss or death of that person could cause the company irreparable damage and possibly force bankruptcy.

A Key Person Term Life Insurance policy is actually life insurance on the business. The company is the beneficiary of the policy and naturally pays the insurance policy premiums. The tax-free proceeds provided from the death of the “key person” allow the business to spend much-needed time to find a new person, or, if necessary, make the appropriate adjustments to insure the company remains profitable. It also helps assure continuity of the business for employees, the local community, and customers. The company can also use the life insurance proceeds to distribute money to investors, pay off debt, or possibly avoid bankruptcy.

Premiums for key-person coverage are based on a many factors, including age, current physical condition (including existing medications), past medical history and the amount of coverage desired. Often, the existence of these conditions may increase the premium, but seldom prohibit the applicant from qualifying for some type of coverage. But before the insurance policy is purchased, a value must be established for the key person and his his/her services to the business. Factors to be considered include the cost of replacing, hiring and training the replacement, the lost sales generated by the key employee and future lost revenue that would have been generated.

Many businesses purchase key-person coverage as a permanent life insurance policy. Term insurance, however, is much less expensive and can generally provide ample coverage. A term life policy can provide a large amount of coverage with the rate guaranteed for as many as 30 years. However, since this type of policy is quite flexible, it can be cancelled at any time without a penalty. Before purchasing a Key-Person term life insurance policy, several different types of coverage should be considered, along with comparing quotes from many different “A” rated life companies (Ratings furnished by A.M. Best Co.)