What Is Key Person Insurance and Does Your Business Need It?
Every business has people it can’t afford to lose—whether it’s the founder, a top producer, or a partner with vital financial or operational knowledge. If that person were to pass away unexpectedly, the financial impact could be devastating. That’s where key person life insurance comes in.
Key person insurance is a policy taken out by a business on a critical employee or executive. The company owns the policy, pays the premiums, and is the beneficiary. If the insured passes away, the death benefit helps cover the cost of lost revenue, business interruption, recruiting and training a replacement, or even buying out the deceased partner’s shares.
This coverage is especially important for small businesses, family-run firms, or startups where knowledge and relationships are concentrated in just a few people. Without a plan in place, a tragic event could cause clients to leave, revenue to dry up, or investors to pull back.
At Diversified Insurance Brokers, we help business owners design custom key person life insurance strategies—whether to protect operations, secure funding, or meet lender requirements. We work with over 75 top-rated carriers to match your coverage needs with your company’s financial goals.
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FAQs: What Is Key Person Insurance?
What is key person insurance?
Key person insurance is a life or disability insurance policy a business takes out on an essential employee or owner whose loss would financially harm the company. The business owns the policy, pays the premiums, and receives the benefits.
Who is considered a “key person” in a business?
A key person may be a founder, executive, top salesperson, specialist, or anyone whose knowledge, relationships, or revenue impact is critical to the company’s operations or financial stability.
What does key person insurance cover?
The policy provides a cash benefit to the business if the insured key employee dies or becomes disabled (depending on policy type). Funds may be used for revenue replacement, hiring costs, debt coverage, or maintaining operations.
Why do companies buy key person insurance?
Businesses use key person insurance to protect against financial loss, secure loans, reassure investors, and ensure continuity if a critical employee can no longer work.
Is key person insurance life insurance, disability insurance, or both?
It can be either. Many companies purchase both life insurance and disability coverage to protect against multiple types of loss affecting their key people.
Who owns and receives the payout from the policy?
The business owns the policy, pays the premiums, and is the beneficiary. The key employee does not receive the benefit.
Is key person insurance tax deductible?
In most cases, premiums are not tax deductible because the business is the beneficiary. However, tax treatment may vary by policy type and structure; companies should review with a tax professional.
How much key person insurance does a business need?
Coverage amounts depend on the value the individual brings to the company—often calculated from revenue impact, hiring and training replacement costs, debt obligations, and business continuity needs.
Can a business insure multiple key employees?
Yes. Companies often purchase separate policies for several critical team members to protect multiple areas of the business.
Do lenders or investors require key person insurance?
In many cases, yes. Banks, partners, and investors may require key person insurance to safeguard their financial interests and ensure business continuity.
About the Author:
Jason Stolz, CLTC, CRPC, is a senior insurance and retirement professional with more than two decades of real-world experience helping individuals, families, and business owners protect their income, assets, and long-term financial stability. As a long-time partner of the nationally licensed independent agency Diversified Insurance Brokers, Jason provides trusted guidance across multiple specialties—including fixed and indexed annuities, long-term care planning, personal and business disability insurance, life insurance solutions, and short-term health coverage. Diversified Insurance Brokers maintains active contracts with over 100 highly rated insurance carriers, ensuring clients have access to a broad and competitive marketplace.
His practical, education-first approach has earned recognition in publications such as VoyageATL, highlighting his commitment to financial clarity and client-focused planning. Drawing on deep product knowledge and years of hands-on field experience, Jason helps clients evaluate carriers, compare strategies, and build retirement and protection plans that are both secure and cost-efficient.
