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What Is Key Person Insurance?

Key person insurance pays the business, not the person’s family, when a founder, partner or employee it relies on dies. Disability, overhead expense and buyout funding are separate products to discuss on their own.

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What Does Key Person Insurance Cover?

If a founder or specialist died, the business could lose revenue and need time and money to replace that person. 1

Key person life insurance can provide money to your business if a founder, partner or employee it relies on dies. 1

Business Continuity After a Death

Confirm who will own the policy, who is insured and who will receive the proceeds; protection for the business is a different objective from money intended for the person’s family. 1,2,4

Identify the People the Business Depends On

A key person may be a founder, partner or employee with expertise, relationships or responsibilities that are difficult for the business to replace. 1
Role to describeWhy it may matter to the businessQuestion to keep separate
Founder with customer relationshipsRevenue depends on those relationshipsWho owns the policy and who receives the proceeds?
Senior technical employeeReplacement would take time and trainingIs the concern death, disability or both?
Partner with operational responsibilityDay-to-day work would be disruptedIs the objective business continuity or an ownership buyout?
1 1,2,4 3,4,1

Who Needs Key Person Insurance?

Consider this when losing a founder, partner or employee would materially affect revenue or leave you with substantial replacement costs. 4

Key Person Insurance Coverage Examples

What happened

Your Business Loses a Founder

A founder dies, leaving the business without key customer relationships and technical knowledge.

How coverage may help

Key person life insurance is intended to pay money to the business after the insured person's death. The policy's ownership and beneficiary need to reflect that purpose. 1,2,4

What happened

A Key Employee Becomes Unable to Work

An employee your business depends on becomes unable to work because of a disability.

How coverage may help

A life policy addresses death, not this event. Key person disability is a separate option to consider for the financial effect on your business. 1,3

How Much Protection Should You Discuss?

Estimate what losing the person would cost your business. Include their contribution to revenue, recruitment and training costs, and the time needed for a replacement to become effective. A technical specialist may take months to replace even when their salary is only a small part of the financial impact. 1

Contribution, Replacement and Downtime

Part of the estimateWhat to bring to the conversation
Contribution to revenueHow the person’s work currently supports sales or delivery
Replacement costRecruiting, hiring and training expense
Time to restore capabilityHow long the business would operate without that person’s skills
1 4

How Do You Compare Key Person Insurance Coverage and Costs?

Coverage Period and Premium Commitments

A term life policy covers a specified period; compare that period with how long the business expects to need protection. 2 Compare premiums over the period you expect to keep the policy, along with renewal options and which values or benefits are guaranteed. 2

How Does Key Person Insurance Compare With Related Coverage?

Death, Disability and Overhead

Death and disability are different events to insure: key person disability coverage is a separate option to discuss if the business is concerned about someone becoming unable to work. 3,1 Discuss key person protection separately from funding an ownership buyout or paying business overhead during an owner’s disability. 3,4,1
ObjectiveEvent in viewKeep distinct from
Key person lifeDeath of the insured personFamily life insurance proceeds
Key person disabilityThe person becomes unable to workA death benefit
Overhead expenseOngoing business expenses during an owner’s disabilityKey person life or replacement disability
Ownership buyoutFunding a purchase of an owner’s interestKey person continuity proceeds

What Do You Need for Key Person Insurance Quotes?

Prepare the person’s role, ownership share and compensation, relevant business financial information, existing coverage and an explanation of the amount requested. 4

Prepare for Individual Underwriting

The application may ask for health and lifestyle information; review answers for accuracy and ask what must happen before coverage takes effect. 2,4
PrepareAsk the broker
Role, ownership and compensationWhat details show why this person matters to the business?
Business financesWhat information supports the requested amount?
Existing coverageHow does the current coverage affect the proposed amount?
Amount estimateHow do revenue contribution, replacement costs and downtime factor in?
Application answersWhat health and lifestyle information must you verify?
Effective dateWhat must happen before the policy takes effect?
4 2,4 2

Key Person Insurance: Key Terms in Plain English

Beneficiary

The person or entity that receives policy proceeds. For key person protection, confirm the intended benefit to the business. 1,2,4

Term Life

Life coverage for a specified period. Compare the term with how long your business needs protection. 2

Frequently Asked Questions About Key Person Insurance

Does Key Person Life Insurance Cover Disability?

A life policy addresses death. Key person disability is a separate option for the risk of someone becoming unable to work. 3,1

Does the Money Go to the Business or the Family?

The beneficiary designation determines who receives the proceeds. Key person protection for the business and life insurance for the person's family serve different purposes. 1,2,4

Can Key Person Insurance Cover an Employee Who Is Not an Owner?

Yes. A key person can be an employee whose expertise, relationships or responsibilities are difficult to replace, as well as a founder or partner. 1

How Do I Estimate the Amount of Key Person Insurance to Buy?

Estimate the financial effect of losing the person, including their contribution to revenue and the time and expense of recruiting and training a replacement. Use that estimate in the discussion about the amount of insurance. 1

What Coverage Is Related to Key Person Insurance?

  • What Are Employee Health Benefits?

    Employer health benefits give eligible staff access to medical care through a group plan or another employer arrangement. When setting a budget or renewing, compare eligibility, provider networks, employee contributions and total cost.

  • What Is Management Liability Insurance?

    Management liability packages can combine D&O and employment-practices coverage for leader and workplace claims, while benefit-plan protection may be a separate part. Shared limits can let a claim in one part reduce what is available for another, so compare the limits across the quote.

Key Person Insurance Guides by State

Which Insurance Providers Offer Key Person Insurance?

  • Alliance Risk

    Alliance Risk arranges key person insurance.

  • Embroker

    Embroker arranges key person insurance.

  • Founder Shield

    Founder Shield lists key person insurance among its specialized coverages.

  • HUB International

    HUB International arranges key person life and disability insurance.

  • Lockton

    Lockton arranges key person insurance.

  • RiskCube

    RiskCube markets key person life insurance placement for startups.

  • The Baldwin Group

    Listed as a benefit/insurance solution in the M&A practice context; ask which legal entity and carrier provide it.

  • Vouch

    Vouch arranges key person coverage for technology businesses.

Updated .

Spot, a product of Tools for Enlightenment, publishes this research and works in the commercial insurance market. Editorial policy. To suggest a correction, contact Spot with the page URL and supporting source.

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