Key Person Insurance

Last updated October 13, 2026

How key person insurance works

Key person insurance is usually term or permanent life insurance owned by the business, which is also the beneficiary. Disability versions also exist. The proceeds go to the company, not the individual's family, and they can be used for purposes such as recruiting a replacement, covering lost revenue, repaying debt, or giving investors and lenders time to adjust.

There is no single formula for the face amount. Companies commonly consider recruiting and training costs, lost sales, and the effect of the person's absence on operations, and some use multiples of compensation as a rough guide. Underwriters will look at the insured's age, health, and the company's finances.

In the US, employer-owned life insurance has tax rules. Under Internal Revenue Code section 101(j), the death benefit is generally excluded from income only up to premiums paid, unless notice and consent requirements are met before the policy is issued and an exception applies. The employee must be told in writing about the coverage and the maximum face amount, must consent, and must be told the employer will be a beneficiary. Premiums are generally not deductible. Confirm the current rules with a tax advisor.

Example

What to watch for

• Consent and notice. Missing the written consent and notice steps before issue can make part of the death benefit taxable.
• It is not liability insurance. It does not protect against lawsuits or cover business losses that are not tied to the person.
• Investor and lender requirements. Some financing documents ask for key person coverage, and the details may be negotiated.
• Coverage gaps. Term policies end, and a departure to a competitor is not covered, only death or disability as defined.

Key person insurance vs. related coverage

• Vs. D&O insurance. D&O protects directors and officers against claims. Key person insurance pays the company when a critical person dies or becomes disabled. They address different risks and are not substitutes.
• Vs. personal life insurance. Personal coverage is owned by an individual for their family. Key person coverage is owned by the business, which pays the premium and receives the proceeds.
• Vs. buy-sell funding. A buy-sell agreement life policy provides money for the surviving owners to purchase a deceased owner's share. Key person coverage funds the business's own losses and transition, not a share purchase.
• Vs. business interruption. Business interruption responds to physical damage to property. It does not respond to the death or disability of a person.
• Vs. liability and workers' compensation. General liability responds to third-party injury or damage claims, errors and omissions to claims over professional services, employment practices liability to employee claims such as wrongful termination, and workers' compensation to workplace injury benefits. None of them pays the company for losing a critical person.
• Vs. key person clauses in contracts. A "key person" clause in a loan, investor or customer agreement is a contractual term that may require the company to carry coverage or take other steps if a named individual leaves. The insurance is one way to satisfy a requirement, not the clause itself.

Who counts as a key person

A key person is someone whose death or disability would materially hurt the company's revenue, operations or ability to raise money. Common examples at technology companies include founders, a CTO or head of research whose knowledge is hard to replace, a top salesperson tied to major accounts, and a person whose credentials or relationships are required for a license or an investor relationship. A company may name more than one person, with a different amount for each.

Deciding how much to buy is a judgment call, not a formula. Companies often consider:

• How long it would realistically take to find and onboard a replacement, and what that would cost.
• Revenue or milestones that depend directly on the person.
• Debt, investor or customer obligations that would be affected.
• The cost of coverage, which depends on the person's age and health and on the type of policy.

Term vs. permanent, and disability coverage

Term life covers a fixed number of years and is usually the simplest and least expensive structure for a young company whose need is tied to a funding or build phase. Permanent life lasts longer and builds cash value, which may suit a company that expects to need coverage for a long period. Disability versions protect against the person's inability to work, with definitions of disability that vary by policy. Underwriting is typically more involved for larger amounts and may include medical questions or exams, and the premium reflects that review.

A second example: a lender asks for coverage

Common mistakes

• Buying a policy without first giving the person written notice and getting consent, which can create tax problems under the employer-owned life insurance rules.
• Naming the wrong owner or beneficiary. The company should generally be both for this purpose.
• Setting an amount from a rule of thumb without testing it against replacement cost and obligations.
• Letting coverage lapse or expire when the need continues, or keeping it after the need ends.
• Assuming it covers a key employee leaving for a competitor. It generally pays only for death or disability as defined.
• Not updating the list of covered people after a reorganization or a new hire becomes critical.
• Treating the policy as a substitute for succession planning, documentation of key knowledge and cross-training.

Why it matters for technology, AI, fintech and digital-asset companies

Early-stage companies often rely on a few founders, researchers, or engineers whose knowledge is hard to replace. Venture investors and lenders may ask about key person coverage during diligence. It is often purchased through a life insurance producer, so your broker can coordinate it with the rest of your program.

Small founder-led teams, single-researcher breakthroughs and thin management benches are common at AI, fintech and crypto startups, which makes concentration risk a real diligence topic. In regulated fintech and digital-asset businesses, a single compliance officer or licensed principal can be required for the business to operate, which raises the cost of losing that person. Investors and lenders may ask whether coverage exists, though what they require varies by deal. Your broker can coordinate with a life insurance producer and connect it to the rest of your risk program, including first-party coverage for company losses and crime coverage for employee dishonesty. See venture-backed startups and directors and officers liability for related reading.

Related terms

Frequently asked questions