Key person insurance is a life or disability policy owned by the corporation on a key individual whose loss would materially damage the business, providing capital to absorb that impact and fund continuity.
The insured event is not just death. A key person who becomes permanently disabled, or who departs unexpectedly, creates a financial gap the business may not be able to absorb from operating cash flow alone. Key person insurance funds the recruitment and onboarding of a replacement, services debt if covenants include key person provisions, and provides liquidity during the transition period while the business stabilizes.
For lenders, key person insurance on the business owner is sometimes a condition of the credit facility, because the lender’s security depends on the business generating sufficient cash flow to service the debt, and that cash flow may depend significantly on the owner. For buyers assessing a business in due diligence, the absence of key person coverage on an owner-dependent business is a specific risk that affects valuation and deal confidence.
See also: Corporate-Owned Life Insurance · Buy-Sell Agreement · Key Person RiskKey person insurance is a risk management tool and a valuation consideration. See how Wefinx approaches exit planning.