Key Person Protection for Business Owners

Some businesses depend heavily on one owner, executive, producer, or specialist. Key person life insurance can provide the business with financial resources if the death of that individual would materially disrupt operations or revenue.

What is key person protection?

Key person protection is life insurance a business may purchase on an owner, executive, salesperson, technical specialist, or other individual whose death could create a significant financial loss for the company.

The business is typically the policy owner, premium payer, and beneficiary, subject to applicable consent, notice, tax, and policy requirements. The purpose is to give the business financial resources while it responds to the loss.

Business protection, not personal replacement income

Key person coverage is generally structured to protect the business from financial loss. It is separate from the personal life insurance an individual may own for family protection.

Who can be considered a key person?

A key person is not defined only by job title. The better question is whether the business would experience a meaningful financial disruption if that person were gone.

• Founder or majority owner whose relationships drive revenue
• Executive responsible for major decisions or operations
• Top salesperson with a large book of business
• Licensed or credentialed professional required for the company to operate
• Technical expert with specialized knowledge that is difficult to replace
• Employee whose reputation or relationships are closely tied to major clients or contracts

How a key person policy may help

Policy proceeds can provide liquidity during a period when revenue, operations, or leadership may be under pressure. The business decides how to use proceeds in accordance with the policy and applicable law.

• Recruit and train a replacement
• Offset a temporary loss of revenue or productivity
• Cover operating expenses during a transition
• Address certain business debts or obligations
• Provide time to reorganize, sell, or close the business if necessary
• Support continuity while customers, employees, lenders, and vendors adjust

Key person coverage is different from buy sell planning

Key person coverage is designed to protect the business from the financial impact of losing an essential person. Buy sell planning is designed to address what happens to an owner’s business interest after a triggering event such as death or disability.

How much coverage should a business consider?

There is no universal formula. The amount should relate to the financial impact the business could reasonably experience, including revenue tied to the person, replacement costs, business debt, client relationships, temporary expenses, and the time the business may need to stabilize.

Ownership, consent, tax, and review considerations

Business owned life insurance can involve important legal and tax rules, including notice and consent requirements in certain situations. Before a business purchases coverage on an owner or employee, coordinate with a licensed insurance professional and the company’s tax and legal advisors.

A business should revisit key person risk when leadership changes, revenue becomes concentrated around one person, major debt is added, ownership changes, important contracts are signed, or the value of the business grows significantly.

Important Information: This material is for educational purposes only and is not legal, tax, financial, or individualized insurance advice. Insurance products, ownership structures, underwriting, premiums, tax treatment, consent requirements, and availability vary. Consult qualified insurance, legal, and tax professionals before implementing business owned life insurance or a buy sell arrangement.