Key person insurance gives a business the cash it needs to absorb the loss of someone its revenue depends on. It protects the company, not the family — and that is precisely what sets it apart from every other coverage.
Key person insurance is a life or critical illness policy that the business owns, pays for and benefits from, covering someone whose departure would seriously damage its revenue. The benefit is paid to the business, not to the family, to give it time to regroup.
It replaces neither the shareholders' agreement, nor group insurance, nor the person's own personal coverage. It answers a different question: if this person is gone on Monday morning, what money keeps the business running?
In a small company it is almost never about job title. It is about dependency.
A simple test: if this person left without notice, how many months would it take to get back to where you were, and what would those months cost?
There is no single formula. In practice we quantify what the business would have to absorb, then validate the result with your accountant.
These three get conflated constantly in meetings. They cover different things and can coexist.
| Coverage | Who owns it | What it solves |
|---|---|---|
| Key person insurance | The business | Provides the business with cash to absorb the loss of someone its revenue depends on. |
| Shareholders' agreement funding | The business or the shareholders, depending on the structure chosen | Funds the buyout of a deceased shareholder's shares, so the estate is paid and the survivors keep control. |
| Group insurance | The business, for the benefit of employees | Covers employees' health, dental and income replacement. A retention tool, not a continuity tool. |
| Personal insurance | The individual | Protects their family and personal obligations. Provides no cash to the business. |
FAQ
As a general rule, key person insurance premiums are not deductible from business income, since the death benefit received is not taxable. Exceptions exist, notably where a lender requires the policy as collateral for a loan. Your accountant or tax specialist decides based on your situation.
Key person insurance pays cash to the business to offset revenue lost with a person. Shareholders' agreement insurance funds the buyout of a deceased shareholder's shares. The same business can need both, in different amounts and under different structures.
No. A key person can be an employee with no ownership at all: a salesperson, a production lead, a technical manager. What matters is the economic dependency of the business on them, not their place in the cap table. Their written consent is required to take out the policy.
The business, since it is the named beneficiary. The insured person's family receives nothing from this policy: they must be protected separately by personal coverage. This is a common confusion worth clearing up with everyone involved from the outset.
A first meeting is about understanding your situation. At the La Prairie office, by video or by phone. No fee, no obligation.