Key Person Life Insurance
Life insurance purchased by a business on the life of a key employee or owner, with the business as beneficiary, to protect against financial loss from that person's death.
What It Is
Key Person (or Key Man) Life Insurance is a life insurance policy purchased and owned by a business on the life of an individual whose death would cause significant financial hardship to the company. The business pays the premiums and is the beneficiary of the policy.
The coverage amount is typically based on the estimated financial impact of the key person's death, which may include: lost revenue attributable to the person's relationships or skills, recruitment and training costs for a replacement, debt obligations that may be called due, and contract penalties or lost deals.
Key person insurance can be term life (covering a specific period), whole life (permanent coverage that builds cash value), or universal life. The choice depends on whether the need is temporary (e.g., during a loan period) or permanent (e.g., a founding partner whose expertise is irreplaceable).
From a tax perspective, the business generally cannot deduct the premiums, but the death benefit is typically received tax-free.
Why It Matters for Brokers
For commercial P&C brokers, key person life insurance is a natural cross-selling opportunity. Every commercial account has at least one key person — the owner, the rainmaker, or the technical expert. Many lenders require key person coverage as a loan condition. Brokers who can identify the key person risk and coordinate with a life insurance specialist add significant value to their client relationships.
Real-World Example
A software company has a CTO who personally developed and maintains the company's core product. The company takes out a $3M key person term life policy on the CTO. When the CTO unexpectedly dies, the $3M benefit allows the company to hire two senior developers, maintain operations during a 9-month transition period, and retain clients who might have left due to uncertainty about the product's future development.
Common Mistakes
- 1Not obtaining proper insurable interest documentation — the business must demonstrate a legitimate financial interest in the key person's continued life.
- 2Setting the coverage amount based on emotion rather than financial analysis — key person coverage should be tied to quantifiable financial impact.
- 3Failing to review and update key person coverage as the business grows or the key person's role changes.
How brokerageaudit.com Handles This
The system helps brokers identify key person exposure during the account review process and tracks key person policies alongside commercial P&C coverage for a complete view of the client's risk management program.