Key Person insurance is a life insurance policy that covers your most important team members. In most businesses, this means directors, executives and other key individuals whose loss can be financially devastating to the business.
A Key Person policy allows you to fill the void left behind in the absence of that individual. For instance, the death of your Chief Technology Officer would force you to hire someone qualified to take this person's role. You might even be forced to hire multiple people to compensate for that key person's loss.
The value of a Key Person policy is up to your discretion, but should be enough to cover costs that include recruiting the new employee(s), training and payroll expenses for the individual(s) for a set period of time.
While a Key Person policy addresses day-to-day operations of a business, Buy/Sell Agreements address ownership in the event one of multiple owners passes away.
In many circumstances, leadership is passed along through the departed's heirs, who may not have the skill set or even the desire to work in the deceased's place. Buy-Sell Agreements lay out the terms for sale of a deceased partner's shares of a company in the event of their death.
The contract will include details such as agreements that allow the business to purchase or transfer shares of the business. It will also include instructions on how shares should be valued.
In some cases, a company may not have the liquid funds to buy out a partner's heirs in the case of one or more partners' deaths. Because of this, Buy-Sell Agreements often include provisions for the amount of Key Man Insurance that the company should carry at all times.
By carrying both a Key Person policy and a Buy-Sell policy, you can ensure that the company does not risk either losing shares of the business or having to go into the company's coffers to finance a pay out.