Key Person Insurance & CFI for Late-Stage Companies

Essential team members can make a significant contribution to a company’s success, no matter its size. However, late-stage companies are unique, influencing an array of individuals. When a key person passes away, it often leaves investors, team members, and clients grasping for a clear path forward. Here’s a look at insurance products that focus on a critical member’s death or total disability and how companies can swiftly recover from such a devastating loss.  

What Is Key Person Insurance?

Key person insurance is the traditional way companies create a financial cushion for themselves if a key member of the team suddenly dies. It’s a life insurance policy that a business purchases on an essential team member or executive’s life. The company serves as the primary beneficiary and pays the premium. The policy works as a pure life insurance policy, offering the death benefit. 

Typically, surviving family members use the death benefit to cover funeral expenses, burial arrangements, or even outstanding debt. However, surviving team members usually use the insurance payout for more business-related chores. The deceased’s family usually covers end-of-life planning. Recruiting, hiring, and training a new team member are examples of tasks a key person insurance payout would cover. 

Sometimes a company can’t carry on without that key member, or the remaining team members can’t find a replacement. In this case, the payout can also help pay debts, severance benefits, issue funds to investors, and shut the business down as painlessly as possible. In other words, it allows companies to consider options other than insolvency.

Companies that purchase key person insurance would face significant financial loss if a key member passed away. Key team members could be founders, owners, CEOs, board members, etc. Regarding late-stage companies, critical executives are often named the key person because of their impact on the company. 

What Is Contract Frustration Insurance? 

Another option for covering key team members is contract frustration insurance (CFI) — but it’s likely not the exact product you read about via a Google search. Our sister, Scale Underwriting, offers CFI specifically designed to protect high-growth companies and investors from the impact of a key member’s death or total disability. 

Like key person insurance, CFI provides funds to cover various costs relating to losing a key member. But it’s often challenging for management to estimate how a key team members’ death will impact the company. Scale’s CFI offers a valuable calculation called “ascertained net loss” to help businesses peg these precise numbers. 

Unfortunately, losing a key person can cause companies to miss milestones, decrease in value, and force them to raise more venture capital (VC). Getting operations back on track isn’t merely a quick fix. Backed by Loyd’s of London, Scale’s CFI meets the same “key person insurance” many institutional investors require.

Key Person vs. CFI

Key person and contract frustration insurance cover many vital risks that small, mid-sized, and late-stage companies face. To help you decide which coverage is suitable for your high-growth business, here’s a helpful breakdown of the policy details Founder Shield offers.