What is Executive Insurance? (Key Man Insurance)

In the US, an insurance policy taken out on the life of a company executive or senior employee whose death would cause significant loss to the company is calaled "Executive Insurance". It is more commonly known as "key man" insurance. Basically, it is a life insurance policy on the key person or people in a business. In small businesses, it is usually taken out on the owners and founders -- or those whose absence would cripple or kill the company.

The company pays for the policy and, should the key person in the company die, the policy pays the company. The money can then be used to find a replacement person, or just pay off debts, pay the investors of the company and give severance to remaining employees should the company need to shut down. Essentially, this policy gives the company time to shut down properly instead of just having to file for an immediate bankruptcy.

What Companies Need Key Man Insurance?

All companies do not need this insurance. If your company is a sole proprietorship or run by a single person, then personal life insurance will cover the losses for your family. Key man insurance is needed, however, for small companies or partnerships where the loss would be catastrophic to the other partners or employees working in the business. Also, investors may insist you have key man insurance on key employees of the company before they will buy shares in the business.

How Much Key Man Insurance Does My Business Need?

You'll need enough to cover replacing another person in the short term. Look at the number of people who are key to the business and get a policy on each of them. Consider also how long it might take to get the business back on its feet and pay all obligations, or how much it would take to gracefully shut the company down. Similar to regular life insurance, the key man insurance premium is based on the health history and current health of the employee, their age and salary, so you'll need to keep this in mind when budgeting money for this type of insurance.