What exactly is Key Man / Key Person Insurance?

De/inition -

Key Man / Key Person Insurance is Life insurance and long-term disability income
insurance on major employees, with benefits payable to the business. Key person
insurance has these advantages:

(1) Enhances the ability of the business to continue operations;

(2) Fosters smooth sale of a going business between an estate and a purchaser by
providing funds to buyout the interest of a deceased key person;

(3) Encourages key employees to stay on the job;

(4) Attracts new key employees;

(5) Provides funds for expenses of hiring and training of a replacement key employee;

(6) Provides a line of credit (A permanent life insurance policy has cash values that are
available for loans at advantageous rates.);

(7) Policy proceeds, which are income free, are payable even if the key person is no
longer in the employ of the business at the time of death; however, the business must
continue to make the premium payments after the key person leaves the employment;

(8) A life insurance policy can be surrendered for its cash value or sold to the insured key
person; thus, the business will usually at least receive the return of premiums;

(9) Long-term disability income insurance on a key person also provides funds for salary
continuation to the disabled key person. (For temporary disability, the business might
prefer to self-insure because the expense of premiums for this coverage is generally
excessive when compared with the potential income benefits.)

Source: Answers.com

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