Key employee life insurance is usually purchased on one or more key people in a business to protect the business from the economic loss associated with an untimely death of an important employee. The company buys the insurance to cover the life of the key person and is also the policy beneficiary.
In the event that the key employee dies, the business receives the lump sum policy proceeds that can be used at the company’s discretion to stabilize the company until a replacement employee can be found.
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Types of Key Employee Life Insurance
There are two basic types of life insurance used for key man life policies: term life insurance and universal life or whole life insurance. The type of policy used depends on the specific needs of the business. For example, start-up firms that do not have steady cash flows would use term life insurance because of its relatively low cost and flexibility. On the other hand, more established companies with significant earnings may select universal life or whole life insurance as these policies build cash value, which is an asset on the company’s balance sheet and can be accessed anytime at the discretion of the company.