Chelsey Tucker graduated with a Bachelor of History degree from Metropolitan State University in 2019. She now writes about insurance with her specialty being life insurance and has been quoted on Help Smart Phone and MEL Magazine.

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Dan Walker graduated with a BS in Administrative Management in 2005 and has been working in his family’s insurance agency, FCI Agency, for 15 years. He is licensed as an agent to write property and casualty insurance, including home, auto, umbrella, and dwelling fire insurance. He’s also been featured on sites like

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Reviewed by Daniel Walker
Licensed Auto Insurance Agent

UPDATED: Mar 19, 2020

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What is Key Person Insurance and Does My Business Need ItKey person insurance is business insurance that protects the business against the loss of someone who is essential to its financial well-being. A key person life insurance policy financially compensates the business for any losses due to the death or long term incapacity of the person named on the policy.

This could be the CEO, a vice-president, owner or anyone else whose absence would negatively affect the operation.

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Key person insurance is also known as business life insurance, key man insurance or key woman insurance. The premiums are paid by the company, and the company is the beneficiary of the policy.

In small and medium sized businesses the future success of the company often depends on a few people with special talents, experience and skills. If these key people are lost due to death or disability, the profits of the company could suffer for many years.

In this survey conducted by the National Association of Insurance Commissioners, 71% of small business owners said their were dependent on the skills of only one or two people to run the company.

Yet, only 7% of those surveyed had purchased both key person life and key person disability coverage.

Benefits of Key Person Insurance

In addition to giving customers and employees confidence in the financial security of the business this type of coverage has other benefits. It will:

  • Key Person Insurance What is it

    Cover any training cost of replacement staff

  • Repay any loans held by the key person
  • Meet company expenses if key person is a main force in company sales
  • Pay for any required expert advice or consultant
  • Protect the interests of partners or shareholders if they need to purchase the shares of a deceased partner or shareholder

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Compensation Not Indemnity

The aim of key person insurance is to compensate the business for losses and help the business continue in spite of the loss. It compensates with a fixed monetary amount which is specified in the insurance policy.

Indemnity insurance takes into consideration a specific event to make the insured party whole again. For example, the cost of repairing a car after an accident cannot be specified in advance, but the insurance company must make the insured whole again in the ways specified in the policy. There are several ways a company can avoid financial loss with key person insurance.

Naming a Key Person

The director of a company, a partner, a project manager or other person whose skills the company depends on would be considered a key person. The loss of this person may cause the company to invest in temporary help, training another employee or successor. A key person is uniquely valuable to a company.

Often, an IT person is essential to the smooth running of a business. They have specialist knowledge about the computer systems and software for accounts, administration and product supply.

Key Person Insurance Does My Business Need It

Types of possible key person losses include:

  • Long term illness where a replacement must be trained or an employee has years of experience that cannot be replaced
  • Financial losses from lack of sales or cancellation of projects
  • The loss of a person who has guaranteed a bank for a business loan

In the final example above, the guarantor may be a director or shareholder. The key person insurance can pay off the loan and free the person’s family as well as the business of the financial burden.

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Compare Key Person Insurance Quotes

When the people running a business feel it is time for key person insurance, they need to ascertain the company’s needs. When a key person is identified, the company needs to put a monetary amount on the repercussions of the loss, even temporarily, of that person.

An article from the National Federation of Small Businesses says that the typical key person coverage is in the $250,000 to $1million range, and that one way to determine needed coverage is to multiply the key person’s salary by  eight or ten.

Of course, other source have different ways to compute this need. There are many excellent comparison websites and agents that will help find the right coverage for each business. The amount of coverage needed is often determined in on of these three ways:

  • Key Person Insurance and How it Works for My Business

    The key person’s salary is multiplied by five if the salary relates to the profits of the company

  • The profits of the company can also be multiplied by two for gross profits and five for net profits
  • Using this formula to determine the key person’s contribution to the profits of the company; the key person’s salary is divided by the total salary outlay of the company and then multiplied by the average of the gross profit calculated for two years. That number is multiplied by the number of years it will take the company to recover from the loss of the key person.

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Types of Coverage

The types of coverage include life coverage, critical illness coverage or a combination of both. Some policies will also pay a regular income in the case of long term illness. The main types of coverage are:

  • Life coverage is usually a lump sum paid out upon the death or terminal illness of the person named in the policy
  • Critical illness coverage defines the illness and pays a lump sum
  • Combination of life and critical illness coverage gives a lump sum on death, critical illness or terminal illness
  • Sickness coverage gives a regular income during the time the key person is sick or recovering from injury
  • Premium coverage will make the insurance premium payments for the key person who is unable to work

How Key Person Insurance Works and Does My Business Need It

Key person insurance is just like any other insurance policy that protects a home or family. In the case of key person insurance, the business is the beneficiary and receives protection from financial ruin if it loses a valuable employee, shareholder or director.

Most large companies are well aware of the value of key persons in the business and have insurance that covers them, but small and medium business often don’t realize there is this kind of insurance. They readily insure their equipment and should also consider insuring their key employees.

Insurance comparison websites are the easiest and most efficient way to learn about key person insurance and the different types of coverage. They offer different quotes from several top insurance companies to get the lowest premiums for the type of coverage needed.

To get started enter your ZIP code and compare FREE rates on insurance to protect your business now!