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Key person insurance is a term for a life insurance policy that a company purchases to safeguard itself from the financial loss that would occur in the event that a key employee passed away or became disabled. Key man insurance and key employee insurance are other names for this kind of coverage.
Businesses that largely rely on the skills or services of a select few people, in particular, should consider key person insurance as a crucial risk management tool. As an illustration, a small consulting firm might get key person insurance for its top consultant, who is responsible for the majority of the company's revenue. The business could suffer a large financial loss if the consultant were to pass away suddenly or become handicapped. This loss would include the expense of hiring and training a successor, lost revenue, and lost clients.
Depending on the requirements of the organization, key person insurance policies offer different levels of coverage. Usually, if the key employee passes away or becomes handicapped, the policy pays out a lump payment. The income can be put to use paying off debts, making up for lost earnings, finding and training a replacement, and paying other expenditures related to the loss of the essential employee.
Key person insurance is a useful risk management tool, but it's crucial for firms to thoroughly analyze their requirements and search around for the best policy. The size of the company, the function of the key employee, and the cost of the policy are all important variables to take into account. It's also vital to carefully check the terms and conditions of any insurance policy before purchasing it because certain insurance policies can have exclusions or limitations.
