Key Man Insurance

By: Martin M. Shenkman, CPA, MBA, JD

Life insurance purchased on a key person (sorry about the gender bias, but that's what its historically been referred to as, although Key Person Insurance is certainly a better phrase). For example, a closely held business has a key manager. If that manager died it would take many months to find a suitable replacement, and significant additional marketing costs would have to be incurred to repair the businesses image without the key manager. To address these costs the business purchases a $1 million key man policy on the manager. If he dies, the business will use these funds to rebuild. Contrast this with buy out insurance which is used to purchase an owners' equity in the business in the event of death.

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