“Key Man” insurance is a life and/or disability policy taken out by the business as a beneficiary in the event of death or disability to a particular key employee. This type of policy is also called: key executive coverage, key person coverage and key employee coverage.
The policy works by paying the business in the event of the death or disability of a person who is so important to the business that their loss could destroy the business. The policy is a cheaper option than standard life or disability policies because the policy can be purchased with a “first to die” provision and cover multiple key employees. For example:
A software company founded by three software engineers could take out a key policy on all three of the founders with a “first to die” provision. Upon the death or disability of one of these founders, the policy would pay benefits to the company. The policy would no longer apply to the two remaining founders. The policy payment would be used to replace the efforts of the first founder (hiring personnel, covering loss of sales, etcetera).
Insurance purchased in this manner would be much cheaper than three individual life policies and three individual disability policies.