February 2, 2022

Key Person Insurance | Definition, Coverage and Exclusions

Key Person Insurance | Definition, Coverage and Exclusions

Key Person Insurance, also known as Keyman Insurance, or Keywoman Insurance, is a life insurance policy undertaken by a company on the life of a founder, owner, top executive, or any other invaluable employee who is considered essential for the business’s survival.

Small businesses are often run by a handful of employees. Moreover, most of the business’s operations and success depend on one principal employee-usually the founder, CEO or proprietor of the company. This person is responsible for handling relations with investors, building supply channels, formulating growth plans, and a host of other important tasks.

If anything were to happen to such a key individual, the business at large would suffer hefty consequences and might even have to shut down. Replacing a key employee requires a lot of time and effort, even as day to day operations are hindered. That’s why small businesses and firms purchase a special kind of insurance policy known as Key Person Insurance. Under this policy, the company is the beneficiary and is responsible for paying premiums for the life of its irreplaceable employee.


Key Person Insurance offers a death benefit to a business in the event of the untimely death of its key employee(s). This kind of a policy can be taken on any individual with specialized skills, expertise, and know-how whose loss can cause significant financial harm to the company.

The Key Person doesn’t necessarily have to be the owner or the CEO of the company, it could also be one or more employees such as sales representatives without whom a considerable portion of the business’s operations would tumble.

On the death of the insured person, the company receives the policy’s death benefit, which can then be used for multiple purposes, such as :

  • Offsetting lost revenues from reduced sales, day-to-day operating expenses, or losses resulting from the delay or cancellation of any business project involving the key person
  • Recruiting and training a capable replacement for the key person
  • Paying off debts, distributing money to investors, providing severance to employees, and closing down business in an orderly manner in the event of liquidation
  • If the key person was involved in guaranteeing business loans or banking facilities, the death benefit can also be used to match the value of guarantee

Some Key Person Insurance policies also offer disability coverage in addition to life insurance. Here, pay-out is provided to the company if the key person is incapacitated and no longer able to work at the company due to an accident.

Eligibility Requirements of a Key Person Insurance policy

  • The Key Person Insurance policy has to be a term insurance policy, i.e., a life insurance policy that is limited for a specific period
  • The Key Person being insured should hold less than 51% of the company’s shares. Moreover, the total number of shares held by the Key Person and their family should not be more than 70% of the total shares
  • The business/company must submit proof to confirm that the person being insured is indeed critical to its operations

Key Person Insurance comes with the following general exclusions :

  • The Key Person leaving the company (i.e. when there is no death or disability)
  • Fraud, misrepresentation or intentional dishonesty by the Key Person
  • Death of the Key Person by suicide

Furthermore, any fraudulent statements or deliberate omissions made during the application process of the policy will result in claim denial


Learn about how businesses can cover accidental injuries or illnesses suffered by their employees

Opinions, conclusions and statements of intent expressed in this article are that of the author and Verak does not accept liability for the views expressed unless confirmed by an authorized representative of the Company independently of this communication.