Key Person Insurance is a life insurance policy taken out by a business or family office on an essential individual to mitigate the financial risks associated with their loss.
Key Person Insurance, also known as Key Man Insurance, is a specialized life insurance policy designed to protect an organization or family office against financial loss resulting from the death or disability of a vital member. Typically, the insured individual is someone whose skills, knowledge, or leadership are critical to the success of operations, such as founders, executives, or top investment advisors. The policy owner pays the premiums and is the beneficiary, allowing the proceeds to compensate for lost revenue or cover transition costs.
This insurance plays a crucial role in risk management, helping to stabilize a family office’s financial health by providing liquidity in the event of an untimely loss of a key individual. It supports continuity by funding recruitment, debt repayments, or covering operational disruptions. Additionally, key person insurance can aid in tax and estate planning by structuring payouts strategically and preserving wealth. Integrating this tool within broader governance frameworks ensures that the family office maintains resilience in leadership transitions.
Consider a family office that purchases a $5 million Key Person Insurance policy on its lead portfolio manager. If the portfolio manager unexpectedly passes away, the family office receives the $5 million death benefit. This payout could be used to offset the potential loss of revenue, cover costs of recruiting a new manager, or stabilize investment operations during the transition period.
Key Person Insurance vs. Key Man Clause
While Key Person Insurance is a financial product (insurance policy) protecting against the loss of a critical individual, a Key Man Clause is a contractual provision within an agreement that stipulates actions or consequences relating to the presence or absence of that key individual. The insurance provides financial recovery, whereas the clause governs business or investment arrangements contingent on the key person's involvement.
Who is considered a key person in Key Person Insurance?
A key person is typically an employee or individual whose expertise, leadership, or unique skills are integral to the family office’s success and whose loss would have a significant financial impact.
Can Key Person Insurance proceeds be used for any purpose?
Yes, the proceeds can be used flexibly to cover operational costs, recruitment, debt repayment, or other financial needs arising from the loss of the insured individual, as determined by the policy owner.
Is Key Person Insurance tax deductible?
Generally, premiums paid for Key Person Insurance are not tax-deductible as business expenses, but death benefits received are usually tax-free for the policy owner under standard IRS rules.
