Key person insurance is a life insurance policy a business owns on someone critical to its survival, with the business named as the beneficiary. If that person passes away, the company receives the payout to absorb the financial shock.
It is sometimes called key man insurance. The idea is simple: protect the business from the loss of the person who drives it.
What is key person insurance, exactly?
The structure has three parts.
- The business applies for, owns, and pays for the policy.
- The key person is the insured individual.
- The business receives the death benefit, not the family.
The insured must consent to being covered. This is not something done quietly.
Who counts as a "key person"?
It is anyone whose absence would measurably hurt revenue or operations.
- Owners and founders who hold the client relationships.
- Business partners whose share would need buying out.
- Top producers responsible for a large slice of sales.
- Specialists with irreplaceable technical knowledge.
In a small company, that is often the owner. In a firm of 40, it may be three people.
Why business owners need this coverage
It buys you time
Losing a key person does not pause your obligations. Payroll, rent, and loans continue.
The payout gives you months of breathing room instead of days.
It funds recruiting a replacement
Replacing a senior person is expensive and slow. Search fees, higher pay, and lost productivity all cost real money.
It satisfies lenders
Many banks and SBA lenders require life insurance on the owner as loan collateral. No policy can mean no financing.
It funds a buy-sell agreement
If a partner passes, their ownership stake typically goes to their heirs, who may have no interest in your business.
A funded buy-sell lets the surviving owners purchase that stake at a price agreed in advance. Without funding, a buy-sell is just a promise.
It reassures everyone watching
Clients, staff, and investors all want to know the business survives a bad year. Coverage is evidence of a plan.
How much coverage does a business need?
There is no single formula, but common approaches include:
- Multiple of salary — often 5 to 10 times the key person's compensation.
- Contribution to profit — the revenue directly tied to them.
- Replacement cost — recruiting, training, and ramp-up time.
- Debt obligations — enough to clear loans a lender requires covered.
A note on taxes
Premiums for key person insurance are generally not tax deductible when the business is the beneficiary. The death benefit is generally received income-tax free, though specific rules and notice requirements can apply to employer-owned policies.
Because business tax treatment gets technical fast, confirm the details with your CPA or tax advisor before you structure anything.
Not sure who in your company should be covered, or for how much? We will review your structure and lender requirements, then compare quotes across carriers, free of charge.