Key-person insurance
Key-person insurance is a life or disability insurance policy that a company takes out on a person critical to the business, with the company as owner and beneficiary.
Key-person insurance protects a business against the financial impact of losing someone it depends on. The company usually owns the policy, pays the premiums and receives the payout. The insured person is typically the founder, a co-owner or a senior executive whose loss would hurt revenue, relationships or access to credit.
Policies most often cover death, and some also cover disability. The money can be used for whatever the company needs at that moment: replacing lost income, reassuring lenders, recruiting or paying an interim leader, or funding the purchase of the person’s shares under a buy-sell agreement.
In family companies, key-person insurance is often discussed alongside estate planning and ownership transfer. A lender may ask about it. An advisor may suggest it as part of an emergency succession plan. It is sometimes confused with personal life insurance that the founder holds for their own family, which serves a different purpose and usually pays a different beneficiary.
Key-person insurance or key-person risk?
Key-person risk is the exposure: how much the business depends on one person. Insurance is one way to manage its financial side. It buys time and money. It does not transfer customer trust, decision-making habits or authority with the senior team.
Why it matters for the successor
A family can be well insured and still unprepared. If the founder is suddenly absent, the policy pays out, but someone still has to stand up in front of the board, the bank and the staff the following week. The article on when the founder falls ill suddenly looks at that moment.
This is a general definition only. The family should involve its accountant, lawyer and insurance or financial advisor in deciding whether and how to use key-person insurance.