The loss of a star fund manager, a successful author or a high-profile chief executive through injury, illness or death can have significant financial implications for a company.

However, specialist life and disability insurance known as key person insurance can help companies with lost revenues and incurred costs.

Key person insurance is a form of critical asset protection, said Tim Prifti, London-based active underwriter, accident and health, Kiln Syndicate 510, the Lloyd's syndicate managed by Kiln Ltd. “And for some companies, their intellectual property or key asset is a person with specialist skills, knowledge or contacts,” he said.

The cover provides a “financial cushion” to a company should a key person be unable to work due to temporary or permanent disability from an accident or illness or the person's death, Mr. Prifti said.

The death of a key employee can have a “disastrous effect” on a business, but there are several types of key person insurance that can help pay the costs incurred, said Tom Lobaugh, senior vp at Willis North America in West Palm Beach, Fla. Term life insurance, permanent life insurance, disability insurance and permanent total disability insurance also can be used to provide coverage for the loss of a key person's services, he said.

“Life insurance is more popular because most buyers think of life insurance when they think of key person insurance,” said Mr. Lobaugh. “And disability insurance costs substantially more than life insurance.”

“Often, when disability insurance is recommended by the broker, it is not purchased. But what many employers do not know is their chances of losing the key person to disability, over death, is 17 times greater,” Mr. Lobaugh said.

Key person insurance can be used to cover the loss of future revenue, recruitment costs and to pay death-in-service benefits, said Paul Carter, London-based partner at Glencairn Ltd., a unit of wholesale broker Faber & Dumas Ltd., which is owned by Willis Group Holdings P.L.C.

It often is bought by companies with private owners, Mr. Carter said. Claims payments would be used by business owners to retain control of a company and fund the acquisition of shares in the business should a partner and/or major shareholder die or be permanently disabled, he added.

“The bulk of cover is purchased by companies for executives,” Mr. Prifti said, “but key person insurance is also purchased by hospitals with reputation-enhancing and high-earning surgeons, or publishers looking to protect their revenue streams with multimillion-dollar advance book deals with authors.”

Financial services companies also are typical buyers of key person insurance. “Hedge fund managers, which are integral to attracting investors, are a good example of a business that looks to buy this cover,” he said.

Key person insurance sometimes is purchased by companies that have contracts with key people, such as a sports star, actor, recording artist or film director, said David Bruce, personal accident underwriter at Hiscox Ltd. in London. If the contracted person is unable to work due to an accident or illness, the company may be liable to pay them and pay for a replacement, he said.

Inquiries from companies in the entertainment industry for key person insurance have been increasing lately, said Lori Shaw, Charlotte, N.C., director of sports and leisure at Aon/Albert G. Ruben Insurance Services Inc., a unit of Aon Corp.

Companies have grown more aware of the potential costs to their balance sheets from the unexpected death or disability of a top revenue-producing personality, she said.

Greater awareness of the potential exposures has led to a “spike” in inquiries for key person insurance, and in particular for additional disgrace coverage—that will reimburse a company for out-of-pocket expenses should it terminate an endorsement contract, said Ms. Shaw.

Historically, key person cover is bought by larger entertainment companies with sophisticated risk management, but Aon is seeing more inquiries for key person insurance from smaller companies, said Ms. Shaw.

Key person insurance also is used in corporate transactions such as buyouts or financing. Banks may insist on coverage where revenues depend on a key individual and to ensure financial commitments are met, Mr. Bruce said.

The United States is the biggest market for key person insurance, because of the prevalence of high earners and a greater awareness among companies of the risks and cover, Mr. Prifti said.

But it is unusual for larger companies in the United Kingdom to purchase key person policies, said John Hurrell, chief executive of the Assn. of Insurance and Risk Managers in London. “Limits tend to be relatively low, and there is the question of how you place a value on, say, the chairman of a FTSE 100 company,” he said.

“Whilst some individuals make an immense contribution to their enterprises, it should always be possible in a big organization to ensure that even sudden and unforeseen vacancies are filled without undue disruption. Good succession planning is normally a more effective solution than purchasing key man insurance,” Mr. Hurrell said.

U.S. companies must make certain that there is an “insurable interest,” whereby the policy's beneficiaries must suffer a financial loss at the death of the insured, said Willis' Mr. Lobaugh.

An employer is permitted to purchase life or disability insurance on the life of a consenting employee, as long as the employer would suffer a financial loss from the employee's death or disability. The employee must be highly compensated with pay in the top 20% of money earners in the firm, with 2010 compensation of at least $110,000, Mr. Lobaugh said.

Most U.S. life insurers offer competitively priced key person life insurance, Mr. Carter said. But the largest provider of such coverage is Lloyd's of London, where a fast turnaround, higher limits and more flexible cover generally are available, he said.

Each key person policy written at Lloyd's is tailored to the individual, said Mr. Bruce. For example, most life and disability insurers will exclude risky activities such as motor racing, piloting a private aircraft or visiting war zones, he added. But personal accident insurers at Lloyd's will write this cover, he said.

Lloyd's underwriters also will write confidential life cover, which requires no prior medical examination. This would appeal to a company that wishes to acquire another company with a key person, who may be unwilling to undergo such an exam, Mr. Bruce said.

Lloyd's also covers higher sums insured and can be used to supplement cover from traditional life and disability insurers, Mr. Prifti said. Most disability insurers cap indemnity at around $15,000 per month, but Lloyd's has written coverage with sums insured of more than $100 million to protect a key person, he added.