Key Person Insurance (Key-Man Insurance)
Key person insurance is a life or disability insurance policy taken out by a company on an individual who is indispensable to its business success, to cushion the financial impact of their loss.
Comparison profile
- Trigger
- Fixed sum insured
- Insured interest
- The company's own economic interest, as policyholder and beneficiary, in the continued availability of an individual indispensable to its business success.
- Rating basis
- Age and health of the key person, Sum insured (multiple of salary or estimated economic loss), Policy term, Occupation and risk class
- Typical limits
- Sum insured is sized to the estimated economic loss – a multiple of annual salary, lost profit contribution, or the cost of finding and training a successor – commonly in the range of one to several million CHF/EUR per key person.
- Target segments
- SME, Corporates
Insured events
- Death of the key person
- Permanent incapacity/disability of the key person (where a disability component is included)
- Diagnosis of a critical illness (where a dread-disease component is included)
Key exclusions
- Suicide within an initial waiting period
- Pre-existing conditions not disclosed at underwriting
- War and hazardous activities excluded under the underlying life/disability policy
- Loss of the key person through resignation or dismissal (not an insured event)
Concept
Key person insurance (key-man insurance) is a life or disability insurance policy taken out by the company, as policyholder and usually also as beneficiary, on the life or working capacity of an individual indispensable to its business success – typically a managing director, shareholder, or leading sales or development professional. Its purpose is to cushion the economic damage caused by that person’s death or permanent incapacity (loss of revenue, cost of finding and training a successor, loss of creditworthiness with lenders) through a rapidly available lump-sum benefit.
Insurable interest and structure
Since the company itself is the policyholder and beneficiary, it must be able to demonstrate its own economic interest in the continued availability of the insured person; the sum insured is typically calculated based on the actual or projected economic loss (a multiple of annual salary, lost profit contribution). Key person insurance is often combined with shareholder insurance, which pays out to the heirs of a deceased co-shareholder, thereby enabling the remaining shareholders to acquire that shareholding.
Relevance for insurance practice
Particularly for small and medium-sized enterprises whose success depends heavily on individual people, key person insurance is an important tool for corporate risk provision and is increasingly required as security by lenders when arranging financing; for intermediaries, correctly sizing the sum insured based on a well-founded economic loss estimate is essential.
Comparison and delineation
Key person insurance is not a separate class of business but a company-owned application of term life insurance and, where extended, disability insurance, distinguished by its insured party structure: the company, not the key person’s family, is policyholder and beneficiary, and the sum insured is sized to corporate loss rather than family income replacement. It is regularly complemented by combining a term life policy for the death benefit with a disability policy for incapacity, and it is frequently paired with shareholder insurance to fund the buy-out of a deceased co-shareholder’s stake.