Many small and medium-sized businesses really stand on one or two people: the founder, the chief engineer, the one salesperson. Key-person insurance addresses that dependency: the company takes out term life insurance on the life of the critical individual, so that person's loss doesn't drag the business down with them – and the livelihoods of families along with it.
- The policyholder and the beneficiary are typically the company, and the insured is the key person – the payout serves the business's survival.
- Typical goals: funding operations during the transition, the cost of replacement, covering loans, buying out a business share.
- How the premium is accounted for and its tax treatment depend on the structure – involving an accountant is part of the planning.
Why is life insurance a corporate topic?
Because losing a key person is a business risk: lost revenue, stalled projects, uncertain partners, loans that can be called in. A key-person insurance payout provides a financial bridge for exactly that: it buys the company time to reorganize – the same way income replacement does on the family side. The two forms of protection don't replace each other: the key person's own family is protected by their own personal policy.
Typical uses
- An operating bridge: covering wages, rent, and ongoing obligations during the transition period.
- Replacement: the real cost of finding and training a successor.
- Loan cover: personal cover requested behind corporate loans – to meet the bank's requirements.
- Shareholder agreements: financing the buyout of a business share among partners or heirs – with a lawyer's involvement.
Roles and sizing
The typical setup: the company is the policyholder and the beneficiary, and the key person is the insured – with their written consent. Sizing the cover is a business calculation: how many months of operation need to be bridged, and how large the replacement cost and the exposed loan balance are. Underwriting runs on the insured person, often with a medical exam given the larger amounts involved.
Tax and accounting: the accountant's territory
How corporate contracts account for the premium and how the benefit is taxed depends on the structure, and the rules change from time to time – so our rule here is simple: finalize the setup together with an accountant, before you sign: the right questions. Employer group life and accident insurance – as a fringe benefit – is a separate topic: we write about it on csoportos.biz.
A question about your family's situation? Book a free 20-minute consultation →
