Key man insurance provides coverage for businesses in the event of sudden loss of an essential employee due to death or disability. The employee must meet certain criteria, and coverage may include disability insurance. The purpose is to help the business recover and find a suitable replacement.
Key man insurance is a form of insurance coverage available to businesses. Insurance provides resources to help the business weather the unexpected and sudden loss of a person considered essential to the ongoing operation of the business. In most cases, the insurance coverage is valid only in situations where the loss occurs due to sudden death or disability of the insured.
Typically, the insurance provider has a set of minimum requirements that must be met before key man insurance is issued for an employee of any company. The company must be able to demonstrate that the employee has qualities such as competence, creativity or knowledge and skills that are crucial to the continued operation of the company. It is important to note that the insurance coverage is in effect only as long as the individual continues to meet the criteria and remains an important or key element in the business operation.
Not all incidents where a key employee leaves the company are automatically covered by key man insurance. For example, the retirement of a valued employee would not be eligible, as the company would have had ample opportunity to prepare for the employee’s departure and find a suitable replacement. It’s unusual for insurers to cover the sudden layoff or resignation of a key employee, although there are some exceptions. There are examples of key man insurance that will approve the extension of benefits in the event that a key policyholder is convicted of a business-related crime, such as embezzlement.
Almost all forms of key man insurance will cover the sudden death or loss of a key employee due to disability caused by an accident or previously undetected medical issue. Coverage may be in the form of term or whole life insurance and often includes a provision or clause that specifically relates to making a disability insurance payment to the insured company. As with all forms of life insurance coverage, premiums will differ, based on factors such as the amount of coverage requested, the type of incidents covered in the terms and conditions, and any local laws affecting the issuance of the coverage.
The purpose behind key man insurance is to assist the business in keeping the business running as it tries to recover from the loss of a key employee. The coverage disbursement can be used to pay for the outsourcing of functions that the deceased or disabled employee previously performed, at least for a period of time. Many companies use coverage proceeds to temporarily hire consultants to handle responsibilities while a suitable and permanent replacement is located.
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