What is key person insurance?
Key person insurance is a life insurance policy a business owns on an essential person, with the business as the beneficiary. If that person dies, the company receives funds to survive the blow: replacing lost revenue, recruiting a successor, reassuring lenders, or buying time to make hard decisions without panic.
The structure is the reverse of personal life insurance. The company pays the premiums, the company owns the policy, and the company receives the benefit. The insured person simply consents. This is why key person coverage belongs in the same conversation as your operating agreement and your line of credit: it is business continuity infrastructure, not an employee perk.
Who counts as a key person?
Anyone whose sudden absence would materially damage revenue, operations, or the company's ability to borrow: founders, rainmaker partners, a top producer, a technical lead with irreplaceable knowledge, or in many family businesses, the founder's spouse who runs the back office.
A simple test we use: imagine the person gone as of tomorrow morning, and write down what breaks in the first ninety days. If the list includes lost clients, missed obligations, a nervous bank, or a scramble to hire at any price, that is a key person. Most small businesses have one to three. Many insure none of them.
How much coverage does a business need?
Common approaches include a multiple of the key person's compensation, often five to ten times, or an estimate of the profit they drive and the true cost of replacing them, including recruiting, training, and the revenue dip in between. The right number comes from your books, not from a rule of thumb.
Lenders sometimes set the number for you: it is common for banks and investors to require key person coverage as a condition of financing, with the amount tied to the loan. If you are raising money or renewing a credit facility, arriving with coverage already in place changes the conversation.
What does key person insurance cost?
Premiums depend on the insured person's age, health, the coverage amount, and whether the policy is term or permanent. Term coverage on a healthy person in their forties or fifties is typically far less than businesses expect, which is why the honest first step is simply getting real numbers for your situation.
Because the business pays with company dollars, owners often assume the tax treatment mirrors other insurance expenses. It does not always: premiums are generally not deductible, and benefit taxation has rules of its own, including notice and consent requirements that must be handled correctly when the policy is issued. This is exactly the kind of detail an experienced agency handles as a matter of course, and a form filled out wrong at issue can cost a company dearly years later. We coordinate with your CPA so it is done right the first time.
Key person insurance and buy-sell agreements
They solve different problems and often belong together. Key person coverage keeps the business alive after a loss. A buy-sell agreement, typically funded with life insurance, governs who owns the business next and guarantees the money exists to make that transfer happen.
For partnerships and family businesses, the combination is the difference between a hard year and a catastrophe: the key person benefit stabilizes operations while the buy-sell funding lets the remaining owners buy out the estate cleanly, at a price everyone agreed to while everyone was alive. If your business has partners and neither piece is in place, that conversation is overdue.