Key Person Insurance: Protecting the People Your Business Can't Run Without

The business owns the policy, pays the premiums and is the beneficiary. If the key person dies, or is diagnosed with a covered illness if you add critical illness coverage, the business receives a lump sum it can use to:

• Cover lost revenue while things get back on track
• Recruit, hire and train a replacement
• Reassure lenders, suppliers and clients
• Pay down business debt or a line of credit a lender might otherwise call

Ask yourself: if this person were gone tomorrow, would revenue drop? Would clients leave? Would the bank get nervous? Would projects stall because nobody else knows how to finish them? If the answer to any of these is yes, they're probably a key person. In many small businesses, that's the owner.

There's no single formula. Common approaches look at the person's contribution to profits, what it would cost to replace them, and how long it would take a replacement to get up to speed. We'll work through it with you and your accountant so the number is grounded in your actual business.

Premiums for key person life insurance are generally not tax-deductible. In exchange, the death benefit is generally received by the corporation tax-free, and much of it can usually be paid out to shareholders tax-free through the capital dividend account. Your accountant should confirm how this applies to you.