Key Person Insurance: A Plain-English Guide for Business Owners

Every business has a person it cannot operate without. Sometimes it is the founder. Sometimes it is the rainmaker whose relationships are the revenue, or the engineer who holds the product in their head. Key person insurance is a policy the business owns on that person, so that if they die the business receives the cash to survive the loss.

Who it is for

Any business whose revenue, financing, or operations depend heavily on one or two people. Professional practices, family businesses, agencies, contractors, and growth-stage companies with a lender who asked the question in a covenant.

How it is sized

There is no single formula, but the common approaches are:

• Revenue contribution. The share of revenue tied to the person, for the number of years it would take to replace them.
• Replacement cost. Recruiting, signing, training and the productivity gap while a successor gets up to speed.
• Debt coverage. Loans that would be called or renegotiated if the person were gone.

Most cases blend these. Underwriters look at the person's role and the business's financials, and they expect the amount to make sense against both.

Who owns and pays

The business owns the policy, pays the premium, and is the beneficiary. Premiums are generally not deductible and the death benefit is generally received without income tax, but the specifics depend on the structure and the business entity. Your CPA confirms the tax treatment; we handle the instrument.

Term or permanent

Term life fits a defined window: the years until a succession plan matures or a loan is paid. Permanent coverage fits when the need is indefinite or the business wants the policy's cash value on the balance sheet. Many businesses start with term and convert later.

How it fits a buy-sell agreement

Key person coverage protects the business. A buy-sell agreement, funded with life insurance on each owner, protects the owners' families by guaranteeing a buyer and a price for their share. The two are often designed together, with the attorney drafting the agreement and the policies placed to fund it.

Why carrier choice matters

Underwriting a key person case means underwriting a busy person. One carrier is easier on frequent travel, another on a pilot's license, another on a controlled health condition. With eight carriers we place the case where it is underwritten best rather than forcing it through one.

FAQs

Can the key person be the owner?

Yes. Owner-founders are the most common key person.

What happens if the person leaves the company?

The business can keep the policy, surrender it, or in some cases transfer it to the individual. That decision is made when it happens, with your CPA.

How long does underwriting take?

Typically a few weeks. Larger amounts and complex health histories take longer.

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