Key person life insurance is a life insurance policy purchased by a business on the life of a critical individual — typically a founder, CEO, lead salesperson, or technical expert — whose death or disability would cause significant financial harm to the company. The business pays the premiums and is the policy beneficiary. Proceeds can be used to recruit a replacement, cover lost revenue, pay off debts, or fund buy-sell agreements.
Any business with individuals whose departure would materially impact operations or revenue. This includes startups dependent on founder expertise, professional firms with key rainmakers, technology companies with critical engineers, family businesses with a central patriarch/matriarch, and any company where a significant percentage of revenue is tied to one person's relationships or expertise.
The business applies for a life insurance policy on the key person's life, pays all premiums, and is named as the policy owner and beneficiary. Coverage amounts are typically based on a multiple of the person's annual compensation or contribution to revenue (5-10x is common). Term policies are used when coverage is needed for a specific period (e.g., loan term, growth phase), while permanent policies can build cash value and serve dual purposes.
Key person coverage amounts typically range from $1M to $25M depending on the individual's value to the business. Premium is based on the insured's age, health, coverage amount, and policy type. Term premiums for a healthy 45-year-old range from $1K-$5K annually per $1M of coverage. Permanent policies have higher premiums but build cash value. Business-paid premiums are generally not tax-deductible, but proceeds are received tax-free.
The founding partner of a consulting firm — responsible for 40% of the firm's $20M revenue — died unexpectedly. The $8M key person life insurance policy provided funds to retain the partner's client relationships by hiring two senior replacements, cover 18 months of revenue shortfall during the transition, and stabilize the firm's operations.