What Is Key Person Insurance?
Key person insurance is a life insurance policy that a business purchases on the life of an essential employee, partner, or owner. The business pays the premiums and is the beneficiary of the policy.
If the key person dies, the business receives the death benefit to help cover losses, recruit a replacement, pay off debts, or distribute funds to investors.
Who Needs It?
Any business that would suffer significant financial harm from the loss of a specific individual should consider key person insurance. This includes startups where the founder is the primary revenue driver, partnerships where each partner contributes unique expertise, and companies where one employee holds critical client relationships.
Banks and investors often require key person insurance before approving business loans or funding rounds.
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Get Your Free QuoteHow to Structure Key Person Coverage
The coverage amount should reflect the financial impact of losing the key person. Common formulas include 5 to 10 times the person's annual compensation, projected revenue loss during a transition period, or the cost to recruit and train a replacement.
Term policies are most common for key person insurance since the need may diminish as the business grows and becomes less dependent on any single individual. However, whole life policies can be useful for permanent business succession planning.