Some employees are disproportionately important to a firm’s success. Key person insurance is life or disability coverage purchased by a business on the life or health of a critical employee, with the business as beneficiary. The proceeds help the company absorb the financial impact of losing that person.

Uses of the benefit include recruiting and training a replacement, offsetting lost revenue, and reassuring lenders or investors. The amount of coverage is typically related to the key person’s contribution to profits or to the cost of replacement. Underwriting focuses on the individual’s health and the business’s insurable interest.

Tax treatment of premiums and proceeds varies by jurisdiction and structure. Clear documentation of why the person is key and how the benefit will be used strengthens the case for coverage. The policy is a practical risk-management tool for businesses that depend heavily on a few individuals.

• Life or disability cover on a critical employee
• Business owns the policy and is beneficiary
• Helps fund continuity after loss of the individual
• Amount based on economic contribution or replacement cost