Key person insurance is life (and sometimes disability) insurance on specific key employees, typically the founders, owners, or important executives – the people who are crucial to the company’s survivability.
Unlike personal life and disability insurance, the business buys a key person policy, pays the premiums and is the beneficiary. If the covered employee dies, the business gets the insurance payoff.
Insurance proceeds can be used in a variety of ways, including paying off debts, offsetting day-to-day operating expenses, supplementing lost revenues until a replacement can be hired, or, in extreme cases, distributing money to investors, paying severance to other employees and closing the business down in an orderly manner.