It is common for companies to take out key man life insurance policies on their chief executive officers or the holders of key product knowledge—but what about the CFO?
First, let’s look at the reasons for key-man insurance. It is intended to at least cover the cost of recruiting and training a replacement, and can also be used to fulfill any contractual pay or benefit obligations to the person’s surviving spouse. The most justifiable use of this insurance is when the partners in a partnership need the resources to buy out the shares of any partner who dies.
These traditional reasons do not warrant the purchase of key-man insurance for the CFO. Companies should have a sufficiently deep management team to be able to promote a CFO from within, or at least adequately backfill the position until an outsider is hired.
However, there is a scenario when such insurance might make sense. If the current CFO is deeply involved in financing arrangements and there is a serious risk that the financing could be lost in the event of the CFO’s demise, then the insurance proceeds could compensate for the lost funds. If this scenario is the reason for having key-man life insurance, then the amount of the insurance should approximate the amount of funding at risk of being lost.