Key person insurance is designed to insure the lives of your key executives. It helps you protect yourself, the company, and its creditors against the financial impact (loss) should one of your key executives suffer a disabling illness, injury, or premature death.
Essentially, key person insurance:
Effective leadership recognizes and values talent. Your leadership team reflects what you consider to be mission-critical talent for your business and how it best serves your customers. The members of your team also highlight what is necessary in order for you to do what you do best.
As you think about your leadership team, have you considered what would happen in the event your lost a member of your team unexpectedly? Just ask: would the unexpected loss of any member of my team cause any of these economic challenges for our business:
If you answered "yes" to any of these questions, leadership economics comes into play. Leadership economics is about minimizing risk, maximizing certainty, and mitigating hardship. Insure the economic loss your business would suffer in the event a member of your team experienced a disabling injury, illness, or even a premature death.
The amount of life and disability insurance the business may need for a given executive depends on a variety of financial underwriting factors.
Generally speaking, key person life insurance amounts are based on a multiple of an individual executive's salary. The multiple generally runs from 2 to 6 times their compensation. Other factors are also considered, including:
Your CPA or other financial advisor can also be a great resource for estimating the appropriate value of a key executive.