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“What is KEY PERSON insurance”?

Simply put, Key Person insurance is life insurance purchased on any key individual in an organization. Any one of several types of life insurance (Term, Universal Life, Universal Variable Life, etc.) can be used for this purpose (there is not enough space in this column to describe the differences at this time).

The organization (either for profit or not for profit) is usually the owner and beneficiary of the policy. The purpose of this insurance is to provide the organization with enough money to sustain the loss of a crucial individual due to their death. This typically includes costs associated with the search for and hiring of a replacement as well as loss of revenue.

In some instances, the insurance contract can also be a source of funding for a buy-sell agreement where the death benefit can be used by the organization to purchase the shares of the deceased individual from their family. With increasingly greater frequency, lenders are requiring Key Person Insurance on the principals of an organization as a pre-requisite to closing on a loan.

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