Key Person Coverage.
Some businesses lose a person. Others lose the person the business was built around.
If one individual holds the client relationships, the technical knowledge or the lending relationship, their sudden absence is not a staffing problem. It is a revenue problem, a covenant problem and frequently a survival problem.
Key person coverage pays the company, not the family. It funds the gap while the business recruits, reassures lenders and clients, and buys the time that decides whether the company recovers or unwinds. Personal life insurance does not do that; it pays the household.
It pays the company, not the family
This is the point most owners miss, and it is the whole reason the coverage exists.
Personal life insurance
Owned by the individual, paid to their family. It protects the household and does nothing for the business that depended on them.
Key person coverage
Owned by the business, paid to the business. It funds the operational hole: lost revenue, recruitment, and the period while relationships transfer.
Both are usually needed
A founder typically needs personal cover for the family and key person cover for the company. They solve different problems and neither substitutes for the other.
The person must consent
Insurable interest is required and the individual signs. In practice it is received well, because it says plainly that the business depends on them.
The first year after
The benefit is not compensation for a person. It is working capital during the period when a business is at its most fragile.
Replaces lost profit
Revenue attached to one individual rarely survives their departure intact. The benefit funds the shortfall while the business stabilises.
Pays for a replacement
Recruiting a senior specialist takes months and costs more than most owners budget, and the successor is rarely productive immediately.
Reassures lenders
Debt covenants frequently reference the principal. Cash on the balance sheet is what prevents a facility being reviewed at the worst possible moment.
Holds the client base
Clients ask questions when the person they trusted disappears. Having the resources to service them properly is what stops the drift.
Buys decision time
Without it, owners make forced decisions in weeks. With it, they make considered ones over months.
Supports a sale or transition
If the answer is to sell rather than rebuild, the benefit funds an orderly process rather than a distressed one.
Structure, and the mistakes we see
Sizing by instinct
Round numbers chosen because they sound adequate. The figure should follow from profit contribution, replacement cost and debt exposure, and the calculation takes an hour.
Ownership set up wrongly
The business must own and be the beneficiary for this to work as intended. Policies written personally and pointed at the company create tax and legal problems.
Ignoring disability
Long-term disability of a key individual is statistically more likely than death and produces the same operational gap. Covering only death addresses half the risk.
Forgetting the second person
Businesses insure the founder and overlook the one salesperson holding the major accounts, or the engineer who is the only one who understands the system.
Letting it go stale
Cover set when the business was smaller no longer matches the exposure. It should be reviewed whenever revenue or debt changes materially.
Confusing it with buy-sell
Two different jobs. One replaces earnings, the other funds a share purchase. Doing one and assuming it covers the other leaves a real gap.
52 carriers, and one health file
Key person cover is life insurance underwritten on an individual, which means the outcome depends heavily on where the case is placed. Health history, age and occupation are weighed very differently across the market.
Place the health file well
The same application can be Standard at one carrier and rated at another. With 52 life carriers we place it where it is viewed most favourably.
Match the term to the need
If the exposure is a ten-year loan, a permanent policy may be unnecessary. If the person is central indefinitely, term alone may leave a gap.
Structure ownership properly
Business-owned and business-beneficiary, documented correctly, with a written understanding of what happens if the person leaves.
Consider disability alongside
Priced together, and frequently the more probable claim. Most businesses that buy both say the conversation changed how they saw the risk.
Tell us who the person is, and we will size it properly.
Their role, their contribution to profit, and any debt underwritten against them. That is everything needed to arrive at a defensible figure rather than a round one, and to price it across 52 carriers. No cost, no obligation.
Key person coverage, answered plainly
Who counts as a key person?+
Anyone whose absence would materially reduce revenue or the ability to operate. Usually a founder or owner, sometimes a lead salesperson holding the major relationships, a technical specialist nobody can replace quickly, or the person the bank underwrote the loan against.
Who owns the policy and who gets paid?+
The business owns it, pays the premium, and is the beneficiary. That is what distinguishes it from personal life insurance, which pays the family. The insured person must consent, and in practice most see it as recognition of their importance.
How much coverage is right?+
There is no formula that fits every case. Common approaches are a multiple of the person's contribution to profit, the cost of recruiting and onboarding a replacement, the revenue at risk while relationships transfer, and any debt that would be called. We work through those rather than apply a rule of thumb.
Is the premium tax deductible?+
Generally not, because the business is the beneficiary. The death benefit is usually received free of income tax, which is the more valuable side of the equation. Specific treatment depends on your structure and filings, and that is a question for your accountant.
Our lender is asking for it. What do they want?+
Lenders frequently require life cover on the principal as a loan condition, sometimes assigned to them as collateral. There is a real difference between a policy the business owns and one collaterally assigned, and it is worth structuring deliberately rather than signing whatever is put in front of you.
Is this the same as a buy-sell policy?+
Related but distinct. Key person replaces lost earnings and stability for the company. Buy-sell funds the purchase of a departing owner's shares so the survivor is not in business with an estate. Many companies need both, and they are frequently written together.
Can we cover disability as well as death?+
Yes, and it is often the more likely event. Key person disability pays the business if the individual is unable to work for an extended period. It is underwritten separately from life cover and is worth considering alongside it.
What happens if the person leaves?+
The policy stays with the business and can usually be transferred to a new key person, surrendered, or in some cases sold to the departing individual. It is worth agreeing that outcome in advance rather than at the point of exit.