It's a form of insurance designed to repay all or part of a company's debts should a key employee die or suffer a critical illness.
The loss of a key person can put immense pressure on remaining owners and senior directors. Apart from increased work loads and potential loss of profits, there may well be the added burden of financial commitments such as outstanding business loans.
Directors may also have made loans to the company themselves, either by cash injection or by leaving salary, bonus or dividends in the business
Lenders usually require this cover and directors may have given personal guarantees – often using their residential home as security – so there is the added need to ensure that dependants of key people are protected.
Bankers are generally hard businessmen especially when their loans are under threat. This often means the small print has certain clauses which can be enacted if the company's operations are threatened, perhaps by the death of a key employee.
Clauses such as -
The responsibility for early repayment of any loans including overdrafts
Bank takes control of some assets
Company assets might fall under the control of the company's bankers should any debts not be repaid immediately, and in turn, this could lead to loan defaults - insolvency (even of a healthy business) - major cash flow problems - the bank calling on personal assets even from the estate of the deceased Director/Partner.