Key Person Insurance is a vital protection strategy for businesses that rely heavily on one or two individuals for success. At Diversified Insurance Brokers, we work with over 100 top-rated carriers and decades of experience to help companies safeguard themselves against the financial impact of losing a key employee, owner, or executive. This type of policy provides peace of mind by ensuring business continuity if an unexpected death or disability occurs.

Understanding Key Person Insurance

Key Person Insurance is essentially life or disability insurance purchased by a business on a vital team member. The business pays the premiums, owns the policy, and is the beneficiary. If the insured person passes away or becomes disabled, the company receives the benefit payout. These funds can be used to stabilize operations, recruit a replacement, or reassure stakeholders and clients during a transition. This is not the same as Buy Sell Life Insurance, which is designed to transfer ownership between partners. If you’re curious about the differences, learn more about Key Person vs. Buy Sell Insurance.

Who Needs Key Person Insurance?

Small and mid-sized businesses often face the highest risk when losing a key leader. Larger organizations may be able to absorb the loss, but companies where one individual is tied to sales, client relationships, or technical expertise are far more vulnerable. If your company depends heavily on a founder, top salesperson, or technical expert, a sudden loss could disrupt revenue, client relationships, and growth plans. Key Person Insurance is designed to bridge that gap, helping businesses remain financially stable and protecting against the domino effects that follow the loss of a pivotal contributor.

Benefits of Key Person Insurance

• Business Continuity: Funds help maintain operations after losing a critical individual so employees and clients experience minimal disruption.
• Protect Revenue: Replaces lost income tied directly to a key person’s efforts, particularly in sales-driven or service-heavy industries.
• Reassure Investors: Demonstrates foresight and stability to stakeholders, which can maintain confidence during periods of uncertainty.
• Cover Recruitment Costs: Provides resources to hire, train, and onboard a qualified replacement without draining reserves.
• Safeguard Credit: Lenders may require Key Person Insurance before approving loans, providing a financial backstop for obligations.
• Stabilize Partnerships: Helps keep agreements intact by supplying capital to buy time while a replacement strategy is implemented.

Types of Coverage

Key Person Insurance can be structured as either life insurance or disability insurance. Life insurance pays out upon death, while disability coverage supports the company if the individual can no longer work due to illness or injury. Many businesses secure both types for comprehensive protection. Coverage can also be structured as term life (to cover critical working years) or permanent life (which may accumulate cash value and serve as a longer-term asset for the company).

How Much Coverage Do You Need?

The right amount of coverage depends on the financial value of the insured individual to your company. Common methods include:

• Multiple of Compensation: Insuring the individual for 5–10 times their annual salary and bonus.
• Revenue-Based Approach: Estimating the percentage of company revenue attributable to the individual.
• Replacement Cost Method: Calculating the expense of recruiting, hiring, and training a replacement, plus interim revenue loss.

Factors such as revenue contribution, client relationships, intellectual property, and specialized skills all play a role. Use our Life Insurance Quoter below to compare policies and determine how much protection is right for your business.

Life Insurance Quoter

Common Misconceptions

“It’s only for large corporations.” In reality, smaller firms are often more exposed. If one person drives most revenue or client acquisition, losing them can be catastrophic.

“It’s too expensive.” Term Key Person policies are often affordable relative to the financial risk they cover. Premiums can be a fraction of the potential loss.

“Employees don’t benefit directly.” While payouts go to the company, maintaining stability protects jobs, benefits, and the company’s future health.

Why Work With Diversified Insurance Brokers?

Since 1980, Diversified Insurance Brokers has worked with family-owned businesses, start-ups, and established corporations to create strong protection strategies. With access to over 100 A-rated carriers, we design coverage tailored to your company’s size, structure, and financial goals. Whether you need a Key Person Insurance policy for one executive or multiple individuals, we ensure your business is equipped to withstand unexpected loss and continue growing with confidence.

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