Key person insurance: What it is and why your business might need it

Every business has someone they can’t imagine running without. Maybe it’s the founder, a partner, a top salesperson, or someone who holds the company together behind the scenes.

Now imagine what would happen if that person suddenly couldn’t come to work due to illness, injury, or even an unexpected passing.

Would your business be able to continue? Could you manage payroll, keep clients happy, or pay off loans? For many small businesses, losing a key person could put the entire company at risk.

This is why key person insurance is such a powerful tool.

According to a survey by the National Association of Insurance Commissioners: 

• 71% of small businesses said they were very dependent on one or two key people for their success. 
• Yet only 22% of them had key person life insurance in place.¹ 
   

That gap leaves thousands of businesses vulnerable, despite knowing just how crucial those individuals are to their success. 

What is key person insurance?

Key person insurance is a life or disability insurance policy that a business takes out on an essential employee – usually someone whose knowledge, skills, or relationships are critical to the company’s growth and operations.

If something happens to that person, the insurance provides a tax-free payout to the business. That money can be used to: 

• Cover lost revenue 
• Hire a replacement 
• Keep the business afloat during a transition 
• Pay off debts or investors 
• Fund a buyout or succession plan 
   

In short, it’s about protecting your business from the financial impact of losing someone irreplaceable. 

Who counts as a “key person”?

A key person isn’t always the CEO or founder (though they often are). It could be: 

• A top-producing salesperson who brings in a large share of revenue 
• A partner who handles operations, client relationships, or finances 
• A technical expert with unique knowledge that’s hard to replace 
• A co-owner whose buyout would be triggered by death or disability 
   

If losing that person would seriously affect the day-to-day running or long-term stability of the business, they’re likely a key person. 

Why your business might need it

Small businesses are often built around a few essential people. Without them, the company might struggle – or not survive at all.

That’s why key person insurance isn’t just a “nice to have.” It’s an important risk management strategy that can keep your business strong, even in uncertain times. 

Real-life examples

Scenario 1: The unexpected illness

A marketing firm’s lead strategist is diagnosed with cancer and must take an extended leave. Her deep knowledge and client relationships are essential. The key person policy provides funds to bring in a consultant, cover lost revenue, and maintain operations while she recovers. 

Scenario 2: Business continuity after loss

A co-founder of a small manufacturing company passes away suddenly. The key person life policy provides a payout to help the remaining partner hire a general manager and pay off a business loan the two had co-signed. 

Scenario 3: Supporting a buyout

Two partners each own 50% of a business. With key person insurance in place, if one passes away, the payout can be used to buy out their share from the estate. This can help keep the business running smoothly and avoid financial strain for both sides. 

How much does it cost?

Key person insurance is generally affordable – especially compared to the cost of not having it.

The cost depends on a variety of factors, including: 

• The age and health of the insured person 
• The amount of coverage 
• The type of policy (term, whole life, or disability) 
   

We can help you determine what’s reasonable based on the size of your business, the person’s role, and your goals for the coverage. 

What type of policy should you get?

Most businesses choose term life insurance for key person coverage. It’s simple, affordable, and provides protection for a set number of years.

But you might also want to consider: 

• Permanent insurance if you want long-term flexibility or cash value options 
• Disability insurance to cover loss of income or contribution due to illness or injury 
   

In many cases, we recommend a mix of life and disability coverage for full protection. 

How we can help

We specialize in helping business owners protect what they’ve worked so hard to build. That means going beyond employee benefits and liability coverage. We’re here to help you think strategically about your people, your risk, and your future.

Here’s how we can support you: 

• Identify who your key people are and where vulnerabilities may lie 
• Review your current business structure and goals 
• Recommend the right insurance strategy—no pressure, no hard sell 
• Support the application and implementation from start to finish 
   

We’re independent brokers, which means we work for you – not the insurance companies. And we’ll always recommend what’s in your best interest. 

Your business depends on more than hard work. It depends on people.

You’ve put everything into building your business. Make sure one unexpected event doesn’t put it all at risk.

Key person insurance is a smart, simple way to protect your company’s future – and gain confidence knowing you’re covered if something happens to your most essential team member.

Ready to find out if your business could benefit from key person coverage? Book your complimentary consultation today. 

Source

Insuring Your Business: Small Business Owners' Guide to Insurance. 2025. Insurance Information Institute. https://www.iii.org/publications/insuring-your-business-small-business-owners-guide-to-insurance/specific-coverages/life-insurance-for-key-employees.