Key Person Insurance: Protecting Your Business from the Loss of Talent

**Key Person Insurance** (often a type of business life or disability insurance) is a policy that a business purchases to protect itself from financial losses that would arise from the premature death or disability of an essential employee. If an individual is critical to the revenue, operations, or growth of a company, that person’s loss can be catastrophic.

How the Policy Works

This policy is owned by the business, which also pays the premiums and is the sole beneficiary of the policy. The insurance proceeds are paid to the business upon the death or total disability of the key employee.

Use of Proceeds: The money is typically used to cover expenses such as:

Hiring and training a replacement executive.
Lost sales revenue during the transition period.
Paying off outstanding loans guaranteed by the key person.

Who is a “Key Person”?

A key person is anyone whose absence would cause a substantial financial drain on the company. This could include:

Founders and CEOs with critical relationships.
Top sales executives who bring in the majority of revenue.
Lead engineers or innovators who hold proprietary knowledge.

Key Person vs. Buy-Sell Funding

While often confused, they serve different purposes:

**Key Person Insurance:** Compensates the business for loss of talent and revenue.
**Buy-Sell Agreement Funding:** Uses life insurance to provide the surviving owners with the funds to purchase the deceased owner’s share from their heirs, ensuring business continuity.

**Business life insurance** in the form of key person coverage is a vital strategy for mitigating risk in high-growth or owner-dependent companies.