Quick answer
Key person insurance protects a business from the financial effect of losing a person whose death, illness or disability would disrupt revenue, relationships, financing or operations. For life coverage, the business commonly owns the policy, pays the premium and receives the death benefit. The amount should come from a documented continuity gap, not a generic multiple of salary or revenue.
The key person may be a founder, salesperson, technical specialist, guarantor or operator. The title matters less than what the business cannot replace quickly.
Who counts as a key person?
A person is “key” when the business depends on a contribution that cannot be replaced without material time or cost. Look for revenue concentration, personally held client relationships, licensing, product knowledge, lender guarantees, signing authority, technical expertise and unfinished projects. More than one person can create a gap, and a founder is not automatically the largest one.
Map the dependency before estimating coverage
How much key person insurance does a business need?
Estimate the financial loss over a realistic recovery period. Include lost contribution margin rather than headline revenue, recruiting and transition costs, debt or lender needs, contract penalties, project delays and professional fees. Then subtract cash reserves, credit the company can still access and other coverage. Document assumptions so the amount can be updated.
Who owns key person life insurance?
The business commonly applies for, owns and pays for the policy and is named as beneficiary. The insured person consents and completes underwriting. This structure keeps claim proceeds with the company for continuity costs. A policy owned by the employee or the employee’s family may serve a personal need, but it does not automatically put cash in the business.
What can the business use the death benefit for?
Claim proceeds can provide general liquidity. The company might recruit a replacement, reassure lenders, retain staff, complete projects, cover lost margin or wind down in an orderly way. Unless the proceeds are legally assigned or governed by another agreement, the policy itself does not force one use. A board resolution and continuity plan can document the intended priorities.
Does key person life insurance cover disability?
No. Life insurance pays after a covered death. A key person who survives but cannot work can create a similar or larger disruption. Disability or critical illness coverage may address different events, subject to definitions and limits. Compare the expected cash need for death, illness and inability to work separately rather than assuming one policy covers all three.
Are key person insurance premiums deductible?
Premiums are generally not deductible merely because the business owns the policy. A narrow deduction may apply in certain collateral-assignment situations when legal requirements are met. Claim proceeds, adjusted cost basis and possible capital dividend account treatment also require tax review. Record the business purpose without promising a deduction.
Can a small business have key person insurance?
Yes, subject to insurable interest, consent and underwriting. Small firms may have greater concentration because fewer people hold essential knowledge or relationships. The amount still needs evidence from the business’s actual exposure and financial capacity.
Is the owner always the key person?
No. An employee, partner or executive can be key when their loss would create the most serious financial disruption. Map dependencies across the company. A founder’s personal life coverage, shareholder-agreement funding and business key-person coverage can be three different needs.
Sources and review notes
The definition and business use were checked against the Canadian insurance glossary and the Business Development Bank of Canada’s business insurance overview. Reviewed August 2026.
