What is key person insurance?
Key person insurance is a life insurance policy a business takes out on a crucial employee like an owner, executive, or other employee whose knowledge, relationships, or revenue impact would be hard to replace. If that key person passes away, the policy benefit can help the business manage the financial strain that follows, from replacing lost revenue to hiring and training a successor.
How does key person insurance work?
When a covered employee passes away—an owner, executive, or other critical employee—the funds of the policy are provided to the policy owner, who pays the policy premium. These funds can be used to help offset lost revenue, recruit and train a replacement, reinforce financial stability, or support business continuity during the transition.
Who’s considered a key person/employee?
A key person is someone whose knowledge, leadership, relationships, or revenue impact would be difficult for the company to replace in a timely manner. A key person or key employee may include:
Owners, executives, or founders
Salespeople
Employees with important relationships with major clients
Technically specialized employees
When should a business consider key person insurance?
You may want to consider key person insurance when the loss of an important employee could affect your company’s revenue, operations, customer relationships, or long-term plans.
What can key person life insurance help pay for?
Depending on the policy and situation, the funds from a key person insurance policy can help:
Replace lost revenue or profits
Hire and train a replacement
Support financial stability and maintain good credit standing
Provide continuing support to the employee’s family
How much key person insurance does a business need?
There’s no one-size-fits-all amount for key person insurance. The right coverage amount can depend on the person’s role, their impact on revenue, replacement and training costs, business debt, and the time it may take to stabilize operations. Our team of life insurance specialists can help you choose a policy that fits your business.
To help you get started, use our key person protection calculator to estimate the coverage your business may want to consider.
Frequently asked questions about key person insurance
In general, key person insurance premiums aren’t tax-deductible when the business is directly or indirectly the beneficiary of the policy.
The business owns the key person insurance policy, pays the premiums, and receives the death benefit if the insured key person passes away. This gives your business the funds to help manage financial strain and plan your next steps.
Term life insurance is generally designed to provide coverage for a set period, while permanent life insurance is generally designed to provide longer-term coverage. The right option for your business depends on your budget, continuity goals, and how long you expect to need the coverage.
If the loss of one person would deeply affect business revenue, operations, customer relationships, or long-term planning then a small business should consider taking out a key person life insurance policy.
Key person insurance is a type of business life insurance. It’s designed to help protect your business from financial strain if a critical owner, executive, or employee dies. Other types of business life insurance serve different purposes, like funding a buy-sell agreement or helping protect family income.
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