Should I buy key person insurance for any of my employees?

First, let's define what key person life insurance is. Key person life insurance is a policy that businesses can buy to cover a person the business depends on for its continued success. The key person could be an employee, a partner, or the proprietor themselves. They are people without whom the company would fail or, at a minimum, take a substantial loss.

Now, if the business is a sole proprietorship and you employ yourself and nobody else, there is no need to get key person life insurance. You are much better off with a personal life insurance policy so your family has some protection when you are gone (for advice on selecting a policy see Before You Commit: Life Insurance 101).

Because the business is paying the premiums for a key person policy, it stands to reason that it will be the beneficiary of the policy. This means that the business will receive the insurance payout when the coverage is triggered. The payout is the then generally used to stave off any financial issues that may arise due to the sudden death of the key person or to find a replacement employee or proprietor.

So, as the name implies, you should buy key person life insurance for anyone within your organization that your business depends on to survive. Look at your business and try to figure out who is irreplaceable. Ask yourself who, if they were gone, would cause operations to grind to a halt. Those are the people you should be insuring.