Key Person Insurance Guide
If losing one person would seriously disrupt revenue, relationships, or operations, key person insurance gives the business the funds to steady itself and move forward. Here's how it works, and how to think about it.
Who this is for
- Businesses where one or a few people drive much of the success
- Founders and partners thinking about resilience
- Owners who want to reassure lenders, partners, or clients
What you’ll learn
- What key person coverage is designed to protect
- How the business owns and benefits from it
- How coverage amounts are usually framed
- Where it fits alongside your other protection
What key person insurance is
Key person insurance is a life insurance policy the business owns on an essential individual, often a founder, a top producer, or someone whose knowledge and relationships would be hard to replace. If that person passes away, the business receives the funds to help it stabilize.
It's worth being clear about what it does and doesn't do. It's meant to buy time and stability, not to replace the person. The point is to give the business room to make sound decisions instead of forced ones.
What it helps the business do
- Bridge lost revenue while the business adjusts
- Fund the search, hiring, and training of a replacement
- Reassure lenders, partners, and clients during the transition
- Buy time to make sound decisions rather than rushed ones
How it's structured
The business is typically the owner, the payer, and the beneficiary of the policy on the key individual, arranged with that person's consent. That structure keeps the funds flowing to the business, which is where the disruption lands.
Sizing the coverage
The right amount is usually framed around that person's economic impact: the revenue tied to them, the cost to recruit and train a successor, and the time the business would realistically need to recover. It's an estimate, not a formula, and the details are worth confirming with your CPA where appropriate.
Questions to consider
- Which individuals would be genuinely hard to replace?
- What would their sudden loss cost the business, and for how long?
- How much coverage would give us room to steady and rebuild?
- Have we confirmed the structure and tax treatment with our professionals?
Common risks business owners overlook
- Assuming a strong team means no single person is truly critical
- Sizing coverage on salary alone, ignoring lost relationships and know-how
- Never getting the key person's consent or documenting the arrangement
- Leaving coverage flat while that person's impact keeps growing
Your next step
If one name came to mind while reading this, that's worth a closer look. A Business Protection Review helps you size the real impact and structure the coverage correctly, alongside your professionals.
Start Your Business Protection ReviewMore in Business Wealth
Business Protection Review Checklist
The people and agreements your business depends on.
Buy-Sell Funding Guide
How to make an ownership agreement actually payable when it's needed.
Business Continuity Planning Checklist
The 'what if' scenarios worth planning for before they arrive.
Ready to turn a guide into a plan?
It's free, and you'll leave clearer than you arrived.
Educational only. Business continuity strategies involve tax, legal, and valuation considerations that must be confirmed with your CPA, attorney, and other qualified professionals. Guarantees are subject to the claims-paying ability of the issuing carrier. NOI does not provide tax, legal, or investment advice.