Key Person Insurance

Key person insurance is a life or disability policy a business takes out on a critical employee, director, or owner. If that person dies, becomes disabled, or suffers a serious illness, the business receives a lump sum to cover the financial impact.

It’s sometimes called key man insurance, though that name is outdated. The idea is simple. If your business would take a serious financial hit from losing a specific person, this cover helps keep things running.

Why It Matters

• Many small and medium businesses rely heavily on one or two people for revenue, relationships, or expertise.
• Losing a key person without cover can mean lost clients, stalled projects, and cash flow problems.
• The payout gives the business breathing room to find a replacement, restructure, or cover debts.
• Lenders and investors sometimes require key person insurance as a condition of funding.

What It Typically Covers

• Death of the insured person.
• Total and permanent disability.
• Temporary disability (in some policies).
• Critical illness or trauma (in some policies).

The policy is owned by the business, and the business is the beneficiary. The key person is the life insured.

Simple Examples

• A small engineering firm takes out key person cover on the founding director who manages all major client relationships. If they’re unable to work due to illness, the business receives a payout to cover lost revenue and recruitment costs.
• A tech startup has a lead developer whose skills are essential to their product. Key person insurance covers the cost of hiring a replacement and the revenue lost during the transition.
• A partnership takes out cover on both partners. If one passes away, the surviving partner uses the payout to buy out the deceased partner’s share and keep the business going.

Common Mistakes or Misunderstandings

• Thinking it’s only for big businesses. Small businesses often have even more concentration risk because they depend on fewer people.
• Confusing it with personal life insurance. Key person insurance is owned by and pays out to the business, not the individual’s family.
• Not updating the cover as the business grows. If your key person’s value to the business increases, the sum insured should keep pace.
• Forgetting tax implications. The tax treatment of premiums and payouts depends on the purpose of the cover (revenue vs capital). Talk to your accountant.

When to Speak to a Broker

If your business depends heavily on one or two people and you haven’t considered what would happen if they couldn’t work, it’s worth having the conversation. A broker can help you work out how much cover makes sense.

Need help?

If you want to protect your business against the loss of a key person, reach out to Tank Insurance and we’ll help you work out what cover you need.

Related Terms

• Directors and Officers Insurance - Protects directors and officers from personal liability claims, while key person insurance protects the business from the financial loss of losing them.
• Insurance Premium - Key person premiums are based on the insured person’s age, health, and the sum insured.
• Management Liability Insurance - Often considered alongside key person insurance for businesses looking to protect their leadership team.