Why Key Employee Insurance Matters

Every business has people who are essential to its success. Whether it's the owner, a top salesperson, a lead technician, or a manager with deep client relationships — certain individuals contribute disproportionately to the company's revenue, operations, and stability.

But what happens if one of those key people is suddenly no longer available?

The Financial Impact of Losing a Key Person

The loss of a key employee — whether due to death, disability, or unexpected departure — can create significant financial challenges for a business:

• Revenue loss: A key salesperson or client relationship manager may be directly responsible for a significant portion of the company's revenue
• Recruitment costs: Finding and hiring a qualified replacement can be expensive and time-consuming
• Training expenses: Even after hiring a replacement, it may take months or years to fully develop the skills and relationships the previous employee had
• Credit impact: Lenders and investors may view the loss of a key person as increased risk, potentially affecting loans or credit facilities
• Operational disruption: Projects may be delayed, clients may lose confidence, and internal morale may be affected

What Is Key Employee Insurance?

Key employee insurance (also known as key person insurance or key man insurance) is a life insurance policy that the business purchases on the life of a key individual. The business pays the premiums, owns the policy, and is the beneficiary.

If the insured key person passes away, the death benefit is paid to the business — not to the employee's family (though the employee's personal life insurance would serve that purpose).

How Businesses Use Key Person Coverage

The death benefit from a key person policy can be used for various business purposes:

• Replacing lost revenue during the transition period
• Covering recruitment and training costs for a replacement
• Reassuring lenders, investors, or business partners about the company's stability
• Funding a buy-sell agreement in partnership situations
• Providing a financial cushion while the business adjusts to the loss

Determining the Right Coverage Amount

There is no one-size-fits-all formula for key person coverage. The appropriate amount depends on several factors:

• The individual's contribution to revenue and profitability
• The estimated cost to recruit and train a replacement
• The time it may take the business to recover from the loss
• Any outstanding business obligations tied to that individual

A qualified advisor can help evaluate these factors and recommend an appropriate coverage level.

Types of Policies Used

Key person insurance can be funded through different types of life insurance:

• Term life insurance — typically the most affordable option for pure death benefit protection
• Whole life or universal life — may offer cash value accumulation that the business can access over time

The choice depends on the business's goals, budget, and planning horizon.

Is a Key Person Review Worth Your Time?

If your business depends on specific individuals for revenue, operations, or relationships, it may be worth reviewing your current protection. A complimentary 15-minute review can help identify potential gaps and understand available options — with no cost and no obligation.