Solo Biz Soft Editorial Team Key person insurance is a life (and sometimes disability) policy a business takes out on someone whose loss would seriously hurt the company — often a founder, a top salesperson, or anyone whose knowledge and relationships are hard to replace quickly. The business, not the person’s family, owns the policy and receives the payout, which is meant to cover the financial shock of losing that person.
Who it actually protects
The business is the policyholder and the beneficiary. If the insured key person dies (or, on some policies, becomes disabled), the payout goes to the company, not to that person’s family or estate. The intent is to give the business cash to cover lost revenue, recruiting and training a replacement, or paying off debt that was personally tied to that individual, during the disruption that follows.
How much coverage is typical
A common starting point is 5 to 7 times the key person’s annual salary, with some businesses going as high as 8 to 10 times salary when trying to also cover replacement recruiting costs and lost profits, not just the salary itself. There is no single right number — it depends on the person’s actual contribution to revenue and how long a realistic replacement search would take.
Term vs permanent policies
Most key person policies are term life insurance, with level premiums over a fixed period like 10, 20 or 30 years, chosen to match how long that risk is expected to matter (for example, until a planned retirement or ownership transition). Permanent policies exist too but are less common for this specific use because of their higher ongoing cost.
Does a solo business need this?
If you are the only person in the business, you are inherently the key person, but a standard key-person policy structure (business as beneficiary) may matter less to you than personal life insurance naming your own family, or a buy-sell agreement if you have a business partner. Key person insurance becomes more clearly relevant once a business has employees or partners whose loss would hit the company’s finances independently of the owner’s own estate planning.
Frequently asked questions
Are premiums tax-deductible?
Generally no, under U.S. tax rules, when the business is the beneficiary, though the payout itself is often received tax-free. Confirm current rules with a tax professional, since this area has specific exceptions.
Does the insured person need to consent?
Yes. The key person must consent to being insured and typically needs to undergo the same health underwriting as any life insurance applicant.
Is this the same as a buy-sell agreement funding policy?
Related but not identical. A buy-sell policy specifically funds a partner or co-owner buyout; key person insurance more broadly covers the financial loss of that person’s contribution to the business.
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This article is general information, not insurance or tax advice. Underwriting, cost and tax treatment vary — talk to a licensed insurance professional and your tax advisor before buying a policy.