Which type of insurance is designed to compensate a business for the loss of a key employee?

Key person insurance, also known as key employee insurance, is a type of life insurance policy that a business purchases on the life of an essential employee. The primary purpose of this insurance is to compensate the business for monetary losses that may occur due to the unexpected death or disability of that key employee. The business is both the beneficiary of the policy and the policyholder, which means that in the event of the employee's death, the business will receive the death benefit. This financial support can be crucial for the company to cover lost revenue, find and train a replacement, and maintain stability during a challenging time.

In contrast, life insurance typically covers individuals' personal needs and is not exclusively designed for business purposes. Disability insurance provides income replacement for employees who become unable to work due to illness or injury, addressing personal income rather than business continuity. Health insurance is geared toward covering medical expenses for employees but doesn’t address the financial impact on a business due to the loss of a key employee. Thus, key person insurance is specifically tailored to meet the unique needs of businesses facing the risk of losing a critical team member.