Key person insurance
The business owns it, the business receives it, and it buys time.
Key person coverage is life insurance a business owns on an individual whose loss would materially damage it. The business pays the premiums and receives the benefit.
It's not about the family — that's separate personal coverage. This is about whether the business survives the year.
What it actually buys
- Time to recruit and train a replacement, which for a specialised role can take a long while
- Working capital while revenue is disrupted
- Reassurance for lenders, who may have covenants tied to specific people
- Confidence for customers and suppliers during a transition
- Funds to buy out an interest, where that's part of the arrangement
Who counts as a key person
- An owner or founder whose relationships drive revenue
- A salesperson responsible for a large share of income
- Someone holding a licence or certification the business trades on
- A technical specialist nobody else can replace quickly
- Anyone a lender has specifically named
The consent requirement
Insurable interest is required, and the person insured generally must consent in writing before the policy is issued. Employer-owned life insurance is also subject to notice and consent rules, and failing them can cost the income-tax exclusion on the death benefit.
Get the paperwork right and get it done before issue, not after. This is the most common technical failure in these arrangements.
How to size it
There's no formula that fits every business. Common approaches include a multiple of the person's compensation, the estimated cost to recruit and replace them, the revenue attributable to them over a recovery period, or the amount a lender requires.
Work it out with your accountant rather than accepting a round number, and revisit it as the business changes.
Practical points
- The business is owner, premium payer and beneficiary
- Premiums are generally not deductible where the business is the beneficiary — confirm with your tax adviser
- Term coverage is usually the efficient choice for a defined risk period
- The policy can often be transferred to the individual if they leave, which is worth agreeing in advance
- Review it annually alongside valuations and lending covenants
Common questions
The business owns the policy, pays the premiums and receives the death benefit. Personal coverage for the individual's family is a separate arrangement.
Generally yes — insurable interest is required and written consent is normally needed before the policy is issued. Employer-owned life insurance also has notice and consent rules, and failing them can cost the income-tax exclusion.
There's no universal formula. Common approaches use a multiple of compensation, replacement cost, revenue attributable over a recovery period, or a lender's requirement. Size it with your accountant.
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This page is general information, not advice about your specific circumstances. A licensed insurance professional can tell you what’s actually available to you.
General information only, not insurance advice. Coverage, availability, and terms vary by insurer and by state, and are subject to underwriting. Quote My Policy LLC is a licensed insurance producer. Nothing here binds coverage.