Key Person

Covers loss of income that may result from the head of the business or other key personnel becoming incapacitated or passing away.

Key Person Insurance

Key person insurance is a type of life insurance policy that provides a death benefit to a business.

Key person insurance may make sense in many circumstances:

  • If the business’ reputation and financial viability are critically linked to the key employee’s name, reputation or unique skills, and the key employee’s death could end the business.
  • If the death of a key employee (like a top salesperson) could quickly threaten the company financially.
  • If a financial institution or other creditor needs collateral for a business loan and requires the option of putting a lien on a key person policy. (This is sometimes called collateral assignment.)
  • If the business is a partnership and each partner wants to be able to buy out the other’s shares in case of an untimely death.

The loss of a key person (caused by death or a severe illness) in a business is detrimental – business operations are interrupted, and sales are typically negatively impacted (for example, clients may take their business elsewhere). Furthermore, investors and creditors of the business may be concerned and force the business into liquidity. At an extreme, the business may face a going concern issue. We cover this a bit more here in this article on Why Your Corporation Should Consider A Key Person Policy.

To lessen the adverse business impact caused by the loss of a key person, key person insurance can be purchased by a business. The business acts as the beneficiary of the policy and pays the required insurance premiums.

Top questions on Key Person insurance

How your policy is structured may depend on your company's legal structure. Typically, the company pays premiums for the key person policy, owns it and is the beneficiary. The key employee must provide consent, in writing, to your company owning the policy.

There's no set formula for deciding the monetary value of your key person insurance. Consider the financial effects a key employee's death would have on your company.

For instance, if you're a sole proprietor you may want enough coverage to help your heirs close your business and pay off any company debts. If you own a larger company you may need enough coverage to replace that person's sales revenue, or to provide a financial cushion while you search for the employee's replacement.

According to the Internal Revenue Service (IRS), premiums paid for a life insurance policy are not a deductible expense on a business' federal income taxes. Check with your tax professional.

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