Key Person Insurance for Your Small Business 

As a business owner, your most important assets are your people – those who help your business grow and thrive. And if something unfortunate were to happen to them, the business could be severely impacted. Having a proper life insurance policy for the loss of a business partner and/or key employees is vital for small businesses to survive the unexpected.  

What is key person insurance? 

Key person life insurance is coverage designed to protect a business for the loss of a key man because of unexpected death or disability. Many businesses rely heavily on the contributions of particular key employees, and their premature departure due to death or disability can have severe effects on the success of the small businesses.   

What does key person insurance cover? 

Key person life insurance is designed to provide the financial resources needed for the business to hire and train a replacement while also weathering the temporary financial impacts of the loss of that key contributing employee. You can choose from term, whole or universal life insurance.  

How to Identify a Key Employee 

There are various ways to compute the economic effect of the loss of a key person. A business owner can ask herself/himself several questions to identify a key employee, including: 

• Would a potentially profitable project have to be abandoned or would a productive department have to be closed?  
•  Would the employee's death result in the loss of clientele or personnel attracted to the business because of his or her personality, social contacts, unique skills, talents, or managerial ability?  
• What effect would the key employee's death have on the firm's credit standing?  
• What proportion of the firm's actual loss is it willing to self-insure, if any?  

Coverages for Small Business Owners  

While key person insurance can provide coverage for your most valued employees, business owners should take other steps to protect the company should one of the owners die, become disabled, or in the event of a bankruptcy, incarceration, divorce, or retirement. Business owners can discuss options like a buy-sell agreement with a trusted attorney, and an insurance representative can assist with providing insurance coverage for business owners that will fund the buy-sell agreement if a premature death or unexpected disability occurs.  

What to Expect When Purchasing a Key Person policy  

Underwriting Process

The underwriting process for a key person policy is similar to that of a life insurance policy; the key person may be required to undergo a medical exam, depending on his or her age and the amount of coverage the business owner is applying for. A business owner seeking a policy will also need to follow financial underwriting requirements by providing documents such as a corporate balance sheet or cash flow statements to ensure that the business would not profit from the key employee’s death or disability, and to offer the appropriate the amount of coverage.

Getting Started

Talking with a qualified insurance agent who is experienced in working with insurance for small business owners is imperative when it comes to ensuring your small business has appropriate insurance coverage. 

Updated 1-12-23