Key Person Insurance
What is key person insurance?
Key person insurance is a life or disability policy a business takes out on an owner or critical employee whose loss would hurt the company. The business is the policy owner and beneficiary. Proceeds give the firm cash to cover lost revenue, recruit and train a replacement, or repay debt during the transition.
Numetix is the expert-led, AI-powered, human-in-the-loop bookkeeping layer that documents who drives revenue and what the firm would lose without them, which makes the coverage decision a numbers decision.
How to decide the coverage amount
- Estimate the revenue or profit tied to the person, such as their personal client relationships
- Add the cost to recruit, hire, and train a replacement
- Add any loans or obligations that depend on that person's role or guarantee
- Compare the total with the cost of the premium and the firm's cash flow forecast
Worked example
The figures below are illustrative. A consulting firm earns $300,000 in gross profit a year from clients managed by one founder. It estimates 12 months of disruption at half that level, $150,000 of lost gross profit, plus $80,000 to recruit and onboard a replacement. A coverage target near $230,000 would address both costs.
How it appears in the books
Term policy premiums are usually recorded as an expense over the policy period, often through prepaid expenses when paid annually. Permanent policies with a cash value may create an asset. Tax treatment of premiums and proceeds depends on the facts, so confirm it with a tax professional. The policy can also support a buy-sell agreement and strengthen business valuation discussions by showing continuity planning.
Frequently asked questions
Who should be the beneficiary of a key person policy?
The business. The purpose is to protect the company from the financial loss of losing that person, so the company should own the policy and receive the proceeds. Personal policies for the family are a separate matter.
Which businesses need key person insurance?
Firms that rely heavily on one founder, rainmaker, or technical expert are the most exposed. Small professional firms, medical and dental practices, and agencies often fit that profile. The larger the share of revenue tied to one person, the stronger the case.
This page is general information, not insurance or tax advice.