Key-Person Insurance

By Tom Taulli

Just imagine if JetBlue’s CEO was killed in, well, an airline accident. No doubt, the stock would fall. Customers would be concerned, as would employees.

Life can change quickly. And, in our competitive business landscape, the change can mean the end of the business.

The good news is that companies can insure their valuable human assets – through something called key-person insurance. This is usually in the form of a permanent life insurance policy, of which the premiums are based on factors such as the insured’s age, health and physical conditions.

Actually, purchasing key-person insurance is relatively straightforward. Many insurance companies offer these types of policies and the premiums tend to be affordable.

It’s the company that purchases the policy (typically with the approval of the board) and pays the premiums. The company is also the beneficiary of the policy.

Of course, a company needs to determine who is a key person. This may sound easy, but a company needs to put some thought into the process. Key persons may be those that have important relationships with big customers or who are the brains behind the company’s technology.

What does a key-person policy do? When the insured dies, the company will receive a fixed amount. The proceeds can help with the transition, such as repurchasing shares from the key person’s heirs or finding a replacement manager.

Also, because a policy often includes the repurchase of equity, a company should seek-out a third-party valuation. And a valuation should be updated annually.

Interestingly enough, a company may have no choice but to purchase a key-person policy. In many cases, a bank will require such insurance for loans or lines of credit.

Yes, key-person insurance is a bit gruesome to think about; however, many successful companies have these policies in place. In a way, it can be a company’s “life saver.”

Tom Taulli is an expert on corporate finance. He is the author of the Complete M&A Handbook (http://www.mergerforum.com/mabook.cfm) and teaches at the USC School of Business. He is the Managing Editor of the Mergerplace M & A Advisor published by http://www.mergerplace.com and provides consulting to business owners. Email: tom@taulli.com.