What is key person insurance?
Many small businesses depend heavily on one or two people, such as a founder, top salesperson or technical lead. Key person insurance (also called key man insurance) protects the business, not the individual's family, if that person dies or becomes unable to work.
How it works
- The business buys the policy, pays the premiums and is the beneficiary.
- The cover amount is based on the financial impact of losing the person.
- If a claim is paid, the business uses the money to stay afloat.
What the payout can cover
- Lost revenue and profits
- Recruiting and training a replacement
- Repaying business loans
- Reassuring lenders, investors and customers
- Funding a buyout of the person's shares (often alongside a shareholder agreement)
How much cover?
Common approaches include a multiple of the person's salary (for example, 5 to 10 times), their contribution to profit, or the size of debts they personally guarantee.
Accounting and tax
Premiums are usually recorded as an expense. Whether premiums are tax-deductible and payouts taxable depends on the country and policy structure, so check local rules.