Protecting Your Business: What Is Key Person Insurance, and Why Should You Care?

shaybachelder
Jul 7
3 min read

Running a successful business takes vision, talent, and perseverance. But what would happen if the most critical person in your company were suddenly no longer there?

Key person insurance can help protect your business—and your peace of mind—if the unthinkable occurs.

In this post, you’ll learn what key person insurance is, how it works, and why it’s an essential part of smart business and tax planning.

🌟 What Is Key Person Insurance?

Key person insurance (sometimes called key man insurance) is a life insurance policy a business takes out on the life of an owner, founder, or essential employee.

Unlike personal life insurance, which protects a family, key person insurance protects the business itself.

How it works:

The business owns the policy and pays the premiums.
The business is the beneficiary.
If the key person dies, the insurance company pays the business a tax-free lump sum.

This payout helps cover the financial impact of losing a key leader or specialist whose contributions are hard to replace.

💼 Who Needs Key Person Insurance?

Almost any business that relies on one or a few people for survival and growth should consider it.

Examples of key persons:

A founder who drives vision and strategy
A top salesperson responsible for major accounts
A lead designer or engineer with unique expertise
A relationship manager with exclusive client connections

If losing this person would jeopardize revenue, operations, or the confidence of investors, key person coverage may be critical.

🛠️ What Does It Cover?

Key person insurance helps your business:

✅ Offset lost profits while you regroup

✅ Hire and train a replacement

✅ Reassure creditors and investors that the business remains stable

✅ Pay off debts to avoid personal guarantees being called in

✅ Facilitate a sale or wind-down, if needed

Without this safety net, a sudden loss could trigger cash flow crises, loan defaults, or even closure.

💵 How Does It Affect Taxes?

Tax treatment varies depending on your jurisdiction, but in the U.S.:

Premiums are usually NOT tax-deductible.
Death benefit proceeds are generally tax-free to the business.
If the benefit is used to redeem ownership interests or pay shareholders, special rules may apply.

This is why it’s wise to work closely with your tax advisor to structure policies appropriately and avoid surprises.

🎯 How Much Coverage Do You Need?

There’s no one-size-fits-all answer, but here are factors to consider:

The person’s direct contribution to revenue
The cost and time required to find and train a successor
Any outstanding loans or guarantees tied to the key person
How long it would take to stabilize the business

A thoughtful calculation—ideally with input from your CPA, insurance advisor, and management team—will help you determine the right amount.

📝 How to Get Started

Here are five steps to make key person insurance part of your business planning:

Identify your key people. Who drives revenue or holds critical knowledge?
Estimate financial exposure. What would the loss realistically cost your business?
Compare policy options. Term insurance may suit most needs, but permanent policies could be appropriate in some cases.
Review ownership structure and tax implications. Make sure the policy aligns with your business succession plan.
Revisit coverage periodically. As your business evolves, your insurance should too.

💡 Final Thoughts

Key person insurance is an affordable, powerful tool to protect your company’s future—and safeguard the livelihoods of everyone who depends on it.

If you’d like to explore whether this strategy makes sense for your business, let’s set up a time to talk. I’m here to help you evaluate options, understand the tax considerations, and put the right protection in place.

Disclaimer: This blog post is for educational purposes only and should not be construed as legal, tax, or insurance advice. Always consult qualified professionals before making decisions.