Key person insurance gives you the financial resources and time to recover and maintain business continuity. Your company pays for coverage on executives, founders or specialists whose death or disability would hurt revenue, operations or investor confidence. The payout includes replacement costs, lost income and transition expenses.
Key Person Insurance
Key person insurance protects businesses from financial losses when critical employees die or become disabled, paying death benefits or income replacement to cover hiring costs and lost revenue.
Find the right key person coverage for your business below.
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Updated: October 15, 2025
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Key Takeaways
Key person life insurance and disability coverage provide financial protection by paying your business directly when critical employees die or can't work.
Coverage doesn't include former employees, personal life insurance needs, or deaths during exclusion periods like suicide.
The insured employee must consent to the policy and complete a medical exam, knowing your business receives all benefits.
What Is Key Person Insurance?
What is the Purpose of Key Person Insurance?
This covers the business's costs when an essential employee dies or can't work due to disability. The coverage gives you time and money to find a replacement, maintain operations and reassure investors or lenders that your business can survive the transition.
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What Does Key Person Insurance Cover?
A key person insurance policy protects your business when you lose someone whose skills or relationships directly impact your bottom line.
Key Person Life Insurance
This coverage pays your business a lump sum when a critical employee dies. If your CTO dies unexpectedly, a $1 million payout covers hiring costs, temporary consultants and lost productivity during replacement.
Key Person Disability Insurance
When an employee can't work due to illness or injury, disability coverage provides monthly payments to your business. Payments begin after a waiting period (typically 90 to 180 days). For example, if your top salesperson suffers a stroke, the policy pays your company $10,000 monthly for up to 24 months to offset lost revenue.
IMPORTANT
You can't secretly insure an employee. The key person must consent to the policy, undergo a medical exam and know that your business is the beneficiary. This protects employees from companies taking out unauthorized policies.
What Key Person Insurance Does Not Cover?
Understanding what key person insurance doesn't cover helps you avoid costly surprises:
Personal life insurance needs | Key person policies benefit your business, not the employee's family | The employee's family receives nothing from your company's key person policy | Your CTO has a $1 million key person policy through your business. When he dies, your company gets the payout; his family receives zero unless he has separate personal coverage. |
Pre-existing conditions (in some cases) | Insurers assess health at application; undisclosed conditions may void coverage. | Disclose all health issues during the application or risk claim denial | Your CFO failed to mention his diabetes diagnosis during underwriting. The insurer denies your $500,000 claim after his death from complications two years later. |
Death or disability during exclusion periods | Most policies have suicide exclusions (first 2 years) and specific illness waiting periods. | Claims filed during exclusion periods won't be paid | Your partner dies by suicide 18 months after policy issuance. The insurer returns premiums paid but denies the $2 million death benefit claim. |
Employees after they leave | Coverage ends when the insured person is no longer a key employee | Update or cancel policies when key people change roles or leave | Your VP of Sales leaves for a competitor. Six months later, she dies in an accident. Your company received nothing because coverage ended at her termination. |
Claims without proper documentation | Insurers require proof of death or disability meeting policy definitions | Keep organized records and follow claim procedures exactly | You file a disability claim but can't provide medical records proving your condition meets the policy's "unable to perform job duties" definition. Claim denied. |
How Much Key Person Insurance Do You Need?
The right coverage amount depends on your key person's revenue and the time it would take to replace them. Most businesses use one of four calculation methods to determine appropriate coverage.
Four Ways to Calculate Coverage
Choose the method that best matches your business structure and financial priorities:
Revenue Multiple | Key person's annual revenue contribution × 3-5 years | A salesperson generating $2 million annually needs $6 million to $10 million in coverage | Revenue-dependent businesses where one person drives significant sales |
Replacement Cost | Recruitment ($50,000) + Training ($30,000) + Temporary coverage ($100,000) + Lost productivity during 6-month transition ($150,000) = Total needed | All costs add up to $330,000 minimum coverage | Businesses focused on immediate replacement expenses |
Income-Based | Annual salary × 8-10 | An employee earning $150,000 needs $1.2 million to $1.5 million coverage | Standard approach recommended by financial advisors |
Debt Coverage | Total business debt ÷ Number of key people | $2 million debt ÷ 2 critical employees = $1 million coverage each | Businesses with significant loans or investor requirements |
Coverage Ranges by Industry
Different industries need different coverage amounts and should insure different roles:
Technology/Startups | $500,000-$3 million | Technical founders, CTOs, lead developers | Pre-revenue: $500K-$1M; Early revenue: 2-3× annual revenue |
Professional Services | $1 million-$5 million | Partners, rainmakers, specialists | 5-10× salary or revenue contribution |
Manufacturing | $500,000-$2 million | Master technicians, engineers with proprietary knowledge | 5-10× salary or replacement cost |
Retail/Restaurants | $300,000-$2 million | Namesake owners, celebrity chefs, key buyers | 3-5× annual revenue (for namesake operations) |
Non-Profits | $200,000-$1 million | Executive Directors, Development Directors | 2-3× annual operating budget |
Disclaimer: Key person insurance involves complex tax, legal, and financial considerations. Consult with qualified insurance professionals, tax advisors, and legal counsel to determine appropriate coverage for your business situation.
Key Person Insurance Coverage: Terms and Conditions
Your policy's specific terms control when you receive payment and how much your business gets. Know these conditions before buying coverage:
Coverage Amount
Life insurance pays a lump sum when the employee dies. Disability coverage provides monthly payments. Most businesses choose five to 10 times the employee's annual salary. Your $200,000 CTO? That's $1 million to $2 million in coverage.
Policy Term
Policies last one year (renewable annually) or longer terms like 10, 20 or 30 years. Annual policies cost less initially, but premiums increase with age. Longer terms lock in rates.
Elimination Period (Disability Only)
You'll wait 90 to 180 days before disability payments begin. More extended waiting periods mean lower premiums.
Premiums
You'll pay monthly, quarterly or annually. Annual payments typically save 5% to 8%. Your business pays all premiums; life insurance premiums aren't tax-deductible, though disability premiums may be.
Beneficiary
Your business receives all payouts. The insured employee must consent and complete a medical exam, but has no claim to benefits.
Key Person Insurance Exclusions
Key person insurance policies exclude certain situations:
Suicide within two years (life insurance)
Undisclosed preexisting conditions
Illegal activities or self-inflicted injuries
War or terrorism (some policies)
Always review your policy's exclusions before purchasing to understand coverage limits.
Key Person Insurance Policy: Bottom Line
Key person insurance pays your business when a critical employee dies, helping cover lost revenue and hiring costs. You can't use it for resignations or firings, and premiums aren't deductible. But the death benefit comes tax-free, giving your company the financial cushion needed to recover from losing essential talent.
Key Person Insurance: FAQ
We've answered the most frequently asked questions about key person insurance to help you understand coverage options, costs and tax implications:
What is the purpose of key person insurance?
Key person insurance covers your business's financial losses when a critical employee dies or cannot work. The payout helps you hire a replacement, maintain operations and reassure investors or lenders. Your company gets time and money to recover from losing someone essential to revenue or operations.
Is key person insurance tax-deductible?
No. You pay premiums with after-tax dollars under IRC Section 264. The upside? Your company receives the death benefit tax-free under IRC Section 101. This common misconception catches many business owners off guard, so factor the after-tax cost into your budget when calculating coverage needs.
Key person disability insurance pays benefits to the ___?
The company. Your business receives monthly payments, not the employee, after a 90 to 180-day waiting period. These payments offset lost revenue while your key person recovers. Personal disability insurance pays the individual; key person disability coverage pays your business to cover operational costs.
What is key person life insurance?
Key person life insurance pays your business a lump sum when a critical employee dies. You receive money to cover hiring costs, temporary consultants and lost productivity during replacement. It works best for founders, top salespeople or specialists whose death would hurt revenue, operations or investor confidence.
Who needs key person insurance?
You need coverage if one person generates 25% or more of revenue, has specialized knowledge that's hard to replace, or if lenders require it. Startups, family businesses, professional services and small companies with critical talent are prime candidates. Losing this person would significantly impact your bottom line.
How much does key person insurance cost?
A healthy 35-year-old pays $50 to $70 monthly for $1 million in coverage. A 50-year-old pays $150 to $200 monthly. Smokers pay around $200 to $250 monthly at age 45. Your actual cost depends on age, health, smoking status, coverage amount and term length.
What happens to key person insurance when someone leaves the company?
You have four options: cancel and stop paying premiums, let the employee convert it to personal coverage, keep it temporarily during transition, or transfer coverage to their replacement. Cancel promptly to avoid wasting money on coverage you don't need. Coverage ends automatically at termination unless you choose otherwise.
About Mark Fitzpatrick
Mark Fitzpatrick, a Licensed Property and Casualty Insurance Producer, is MoneyGeek's resident Personal Finance Expert. With over five years of experience analyzing the insurance market, he conducts original research and creates tailored content for all types of buyers. His insights have been featured in publications like CNBC, NBC News and Mashable.
Fitzpatrick holds a master’s degree in economics and international relations from Johns Hopkins University and a bachelor’s degree from Boston College. He's also a five-time Jeopardy champion!
Passionate about economics and insurance, he aims to promote transparency in financial topics and empower others to make confident money decisions.