Key Person Protection
What is key person protection?
Key person protection is life insurance a business owns on a person whose loss would hurt the business. The business is the owner of the policy, pays the premium, and receives the benefit.
The person is usually a founder, a top producer, a technical expert, or a manager who holds key relationships. If that person dies, the business gets money to survive the loss.
Who counts as a key person?
Ask one question: if this person were gone tomorrow, would revenue fall, would operations stall, would a lender worry, or would clients leave? If the answer is yes, that person is a key person.
It is often the founder. It is often the person who brings in the business, the person who knows how the operation runs, or the person clients trust by name.
What does the business lose?
- Revenue the person produced
- Relationships with clients, vendors, and lenders
- Knowledge that lives in one person’s head
- Time, while the business searches for and trains a replacement
- Confidence, from the team, the bank, and the market
How does it work?
- The business identifies the key people and the financial impact of losing each one.
- The business applies for life insurance on each key person, with their consent.
- The business owns the policy and pays the premium.
- If the key person dies, the death benefit is paid to the business.
- The business uses the money to keep operating, hire and train a replacement, pay down debt, or reassure lenders and clients.
What can the money be used for?
- Replacing lost revenue while the business adjusts
- Recruiting, hiring, and training a replacement
- Paying down a loan or a line of credit
- Reassuring a lender or a major client that the business is stable
- Buying time, so the business is not forced into a rushed decision
How much coverage is enough?
There is no single number. The amount depends on what the person is worth to the business: the revenue they produce, the cost to replace them, and the debt or obligations tied to them. A review looks at those numbers together and sizes the coverage to the real exposure.
What should you watch out for?
- The key person must consent to the policy, and the coverage should be explained to them.
- The business should be the owner and the beneficiary, so the money reaches the business.
- The amount should be reviewed as the business grows. Coverage that fit three years ago may be far too small today.
- Key person coverage protects the business. It does not replace an executive bonus plan, which rewards the person. Many businesses use both.
Common questions
Is key person insurance the same as an executive bonus plan?
No. With key person coverage, the business owns the policy and receives the benefit. With an executive bonus plan, the employee owns the policy and the family receives the benefit. One protects the business, the other rewards the person.
Do we need it if we have more than one owner?
Yes. The key person is often not an owner. It is the manager, the producer, or the expert the business depends on.
What happens if the key person leaves?
The business can keep the policy, end it, or transfer it, depending on the agreement and the policy terms. That choice should be made in advance, not in the moment.
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Content on this page is for education only and does not constitute financial, tax, or legal advice. Please consult your tax advisor or attorney regarding your specific situation.
