Key Person Insurance: What It Covers

Most businesses depend on one or two people whose absence would meaningfully damage revenue - a founder, a top salesperson, a technical lead. Key person insurance is a life or disability policy the business buys on that individual, with the business as beneficiary, to cushion the financial blow of losing them.

What it protects against

• Lost revenue and customer confidence while the role is replaced.
• The cost of recruiting, hiring and training a successor.
• Outstanding loans or credit lines that lenders tied to that person's presence.
• Disruption to a buy-sell agreement or succession plan.

Coverage ≈ replacement cost + revenue impact + loan guarantees

How to size it

Common approaches include a multiple of the person's salary or profit contribution, an estimate of the revenue attributable to them, the cost of finding and training a replacement, and any debt the lender requires them to insure. Many small businesses land between two and five times the key person's total compensation.

Who owns the policy

The business usually owns the policy and pays the premium, making the death benefit payable to the business. Premiums are generally not tax-deductible because the payout is not taxable income. If the key person owns the policy personally, the arrangement is different and should be documented carefully - the tax treatment and control differ in each structure.

Do not confuse it with buy-sell funding

Key person coverage protects the business against lost value. Buy-sell insurance funds the purchase of a departing owner's share. A company may need both, and they are separate policies with separate purposes.

Frequently asked questions

Is key person insurance tax-deductible? Premiums generally are not, and the death benefit is generally not taxable income to the business.

Does it cover disability too? Often businesses add a disability component, since a long absence can be as damaging as a death.

Size a policy with the calculator below.