Most business owners insure their personal lives and their families. Few have adequately insured their business against the loss of the people who drive its success. This is the gap key person insurance fills — and for many businesses, it's the single most important business continuity tool available.
What is key person insurance?
Key person insurance is a life (and optionally disability or critical illness) insurance policy where:
- The business is the owner — the corporation pays the premiums
- The business is the beneficiary — the corporation receives the death benefit
- The key person is the insured — the policy pays out when they die or become disabled
The insurance proceeds flow to the business and can be used for any legitimate business purpose — replacing lost revenue, recruiting a successor, repaying bank loans, or simply buying time to restructure.
Who qualifies as a key person?
- The business owner or founder — especially if the business is wholly dependent on their relationships and expertise
- A key salesperson responsible for a significant portion of revenue
- A technical expert whose proprietary knowledge is irreplaceable in the short term
- A partner or shareholder whose departure would trigger buy-sell obligations
- A senior executive hired to lead the business through a critical growth phase
How much coverage is needed?
Coverage amount typically depends on the key person's contribution to the business. Common approaches:
| Method | Calculation | Best for |
|---|---|---|
| Revenue contribution | 3–5× the key person's contribution to annual revenue | Sales-dependent businesses |
| Profit contribution | 5–10× the key person's contribution to annual profit | Professional services firms |
| Replacement cost | Cost to recruit, hire, and train a replacement + transition losses | Technical or specialized roles |
| Loan coverage | Equal to any personal guarantees the key person has given | Debt-dependent businesses |
How to structure the coverage
Life insurance (foundation)
A permanent or term life policy covers the catastrophic scenario — the key person's death. This is the minimum for any business.
Critical illness (highly recommended)
A key person who suffers a heart attack or cancer may survive but be unable to work for 6–24 months. CI insurance provides a lump sum to bridge this period.
Disability insurance (for key employees)
Monthly disability coverage protects against the most statistically likely scenario — a long-term illness or injury that prevents the key person from working without being life-threatening.
Tax treatment of key person insurance
- Premiums: Generally not tax-deductible for the corporation (unlike group benefits)
- Death benefit: Life insurance proceeds received by a corporation flow through the Capital Dividend Account (CDA) — allowing tax-free distribution to shareholders
- Critical illness proceeds: Received tax-free by the corporation; no deduction for premiums
- Disability premiums: If paid by the corporation, premiums are generally not deductible but benefits are received tax-free
Carrie's view: Key person insurance is often the most straightforward insurance conversation I have with business owners — because the need is usually obvious and the cost is modest relative to the risk it addresses. If your business revenue would drop significantly without you, this should be your first insurance conversation.
Carrie Wang
Carrie is the founder of Seven Lakes Financial Services Inc. and a Sun Life advisor serving clients across Ontario and Saskatchewan. She specializes in retirement, estate, and investment planning, with a warm, personalized approach. She is fluent in English, Mandarin, and Taiwanese.