Every business has at least one employee whom everyone agrees is "priceless." Maybe your business was built from the ground up by one person, or maybe it's run by a small circle of highly skilled, invaluable executives. In any case, it makes sense to think about where you'd be without those employees, and insure against the unfortunate scenario of losing them. Key person insurance does just that, but it may not be the right product for every company.

Key person life insurance policies name the corporation as a beneficiary if a "key person" dies, one way of keeping the company solvent while it recovers from the loss. As the name implies, the "key person" is key to the business' success; without him or her, the company would stumble.

As with any insurance, whether you take out a key person policy and the amount of coverage you choose should depend on your company's structure and business plan, as well as the amount of financial hardship potentially faced without its key person.

"In some cases, small companies think they need key person insurance, when they probably don't," says Mark Johnson of Johnson Insurance Consultants in Duluth, Minn., and past president of the National Association of Insurance and Financial Advisors.

Common motivations for buying key person insurance include covering business debts and leaving a business partner with enough money to continue the business. However, says Johnson, there are frequently other alternatives that can meet those needs. Credit insurance to cover loans, or a buy-sell agreement to protect a business partner, might fulfill your company's financial needs without adding key person insurance to the mix.

"Key person insurance used to be stressed quite a bit by insurance companies. Now it's not talked about as much, but it's not because there's less need," says Stacy Wolfe, vice president and counsel at New England Financial.

"A lot of people just don't believe that they're going to die, but the fact is that the key person is frequently the brains of the corporation, and a critical individual can't be replaced without paying more and going through a struggle," Wolfe says.

When might you need key person insurance? Say you've gotten credit insurance, and your company has enough employees and leadership to continue without its key person. But there are just two problems: If your key person dies, you'll need to hire a replacement — an expensive and time-consuming proposition. And that key person has specialized skills critical to the success of the business. Maybe she's built relationships with vendors, advertisers, or customers that make up a substantial portion of the company's income — a skill set you'll have to look long and hard to replace. You know the company can continue without the key person, but at some financial loss. Now you're ready to look at key person insurance.

How to buy

Typically, key person insurance is built around a permanent life insurance policy. Term life can be had, too, for short-term needs or for cash-strapped companies. Premiums vary, naturally, depending on the age, physical condition, and health history of the key person. Term life is cheaper than a permanent policy, and can be bought to cover the key person through retirement. Alternately, a whole life insurance policy can be bought with riders so that the insured's name can be changed if the key person leaves the company or retires.

Once you've chosen a policy type, determining the amount of insurance you actually need is the next step.

"As a very broad rule of thumb, you can take a one-time multiple of the salary" to determine how much the key person is worth, says Johnson. So if your key person makes $200,000 a year, your minimum coverage should be $200,000.

Of course, the key person could be worth a lot more than her salary. "Maybe you do half your business with one particular buyer, and the personal relationship was developed by the key person. If you suddenly lose 50 percent of your market, what kind of trouble are you in?" asks Johnson. You can use these business relationships, in addition to salary, to calculate the monetary value of a key employee.

Since the policy is owned by the company, it can be continued even after the key person leaves. For example, if your executive retires at 65, the company can offer him the policy as part of his retirement package. Once the policy is in his name, he can designate a different beneficiary.