---
title: "Key Person Insurance: What It Is and Who Gets Paid | Riskado"
description: "Key person insurance is life or disability coverage a business owns on a person it depends on. The business pays the premium and receives the benefit."
url: "https://riskado.com/insurance-terms/key-person-insurance/"
lang: "en"
published: "2026-05-09"
modified: "2026-10-01"
image: "https://riskado.com/og/default.jpg"
alternates:
  es: "https://riskado.com/es/terminos-de-seguros/seguro-de-persona-clave.md"
---

# Key person insurance

[Business](https://riskado.com/business-insurance/) · Updated Oct 1, 2026

Key person insurance is life or disability coverage a business buys on an owner, partner, employee or other person essential to its operations. The business typically owns the policy, pays the premiums and receives the benefit if that person dies or becomes disabled under the policy terms, helping it replace income and keep running.

Also called: key man insurance, key-person insurance, key man insurance policy

Key person insurance turns the loss of someone a business depends on into a sum of money the business can use. The business is the owner and the [beneficiary](https://riskado.com/insurance-terms/beneficiary/), so when the [insured](https://riskado.com/insurance-terms/policyholder/) person dies, or becomes disabled if the [policy](https://riskado.com/insurance-terms/policy/) covers disability, the benefit goes to the company rather than to the person's family. That money can pay for hiring and training a replacement, cover lost revenue or debt, and keep the business operating through the change.

## How the payout works, with a salary-based example

One common way to set the amount is five times the person's current annual salary, according to the [NAIC small business insurance guide (opens in a new tab)](https://content.naic.org/consumer/small-business.htm). That is an approach, not a legal limit or a required amount. Take an illustrative employee earning $100,000 a year:

A key person life policy set at five times a $100,000 salary

Hover or tap a row to highlight it.

| Item | Amount |
| --- | --- |
| Annual salary | $100,000 |
| Policy amount (salary x 5) | $500,000 |
| Insurer pays the business on a covered death | $500,000 |
| Illustrative replacement and transition costs | $180,000 |
| Left for other continuity needs | $320,000 |

The payment assumes the person dies while the policy is in force and the [claim](https://riskado.com/insurance-terms/claim/) is covered. The figures are illustrative and say nothing about the [premium](https://riskado.com/insurance-terms/premium/), which depends on the insured person's age and health, the policy type, the amount, the term and [underwriting](https://riskado.com/insurance-terms/underwriting/).

## Policy types and coverage amounts

Key person coverage is a business use of [life insurance](https://riskado.com/insurance-terms/life-insurance/), and the policy type changes how long it lasts and how it is priced.

A term life policy covers a stated period, and the business receives the death benefit only if death happens during that term. A permanent policy is designed to stay in force longer and may build cash value, so its guarantees, premiums and surrender provisions matter. Key person coverage can also be bought as part of a company's group term life policy, or as an individual policy on a specific owner, partner or executive, according to the [NAIC (opens in a new tab)](https://content.naic.org/consumer/small-business.htm).

Disability is a separate decision. Key-person insurance protects a business against lost income from the death or disability of a key employee, according to the [Connecticut Insurance Department glossary (opens in a new tab)](https://portal.ct.gov/cid/searchable-archive/library/glossary), but a life policy pays on death. Disability benefits need their own policy, rider or provision, with a definition of disability, an elimination period, a benefit period and a benefit amount.

The amount does not have to follow salary. Replacement and training costs, downtime, the person's lost contribution and the cost of buying out a deceased owner's share are other factors, according to the [NAIC (opens in a new tab)](https://content.naic.org/consumer/small-business.htm). A larger benefit generally costs more, and the quote and policy set the actual premium and payout conditions.

## Where you meet the term

The term shows up in a business insurance proposal, a life insurance application, a policy schedule, the ownership and beneficiary provisions, renewal correspondence, a lender's requirement and claim letters. A lender or government loan program may require it, according to [New York DFS small business information (opens in a new tab)](https://www.dfs.ny.gov/consumers/small_businesses). It is not a standard section of a businessowners policy, so a BOP does not mean the business owns a policy on anyone.

Employees meet it too, usually as a consent form. "Key man insurance" is a common synonym, and corporate-owned life insurance is often called "key man" insurance, according to a [New York DFS legal opinion (opens in a new tab)](https://www.dfs.ny.gov/insurance/ogco2004/rg040204.htm).

## Consent rules in Connecticut and New York

Connecticut requires the employee's or retiree's consent for covered employer-owned life insurance and bars retaliation against anyone who refuses, under [Conn. Gen. Stat. § 38a-291 (opens in a new tab)](https://www.cga.ct.gov/current/pub/chap_699.htm#sec_38a-291). The same section keeps the right to insure a person in whom the business has an insurable interest at common law.

New York requires an insurable interest and, with statutory exceptions, the proposed insured's written application or consent before a life policy is made, under [N.Y. Insurance Law § 3205 (opens in a new tab)](https://www.nysenate.gov/legislation/laws/ISC/3205). A corporation can have an insurable interest in an officer, director or employee whose work makes a significant economic contribution and whose death would cause economic loss, according to the [New York DFS opinion on key man insurance (opens in a new tab)](https://www.dfs.ny.gov/insurance/ogco2004/rg040204.htm).

## Questions to ask an agent or insurer

1.  Who owns the policy, who is insured and who receives the benefit? The answer shows whether this is key person coverage, personal life insurance or buy-sell funding.
2.  Does the coverage pay on death, disability or both, and what disability definition, waiting period and benefit period apply? The policy has to state which event triggers payment.
3.  How was the benefit amount calculated? A salary multiple, replacement costs, downtime and buyout needs give different numbers, and the amount should match the business's current exposure.
4.  Did the insured receive written notice and give written consent before the policy was issued? Federal tax treatment of employer-owned life insurance can depend on it.
5.  What happens if the key person leaves, ownership changes or the policy is not renewed? The policy may continue, end or need ownership changes, with tax and beneficiary effects.

## Frequently asked questions

Short answers for owners and employees looking at a key person policy.

### Who receives the key person insurance payout?

The business receives it when the business is the policy owner and beneficiary, according to the [NAIC (opens in a new tab)](https://content.naic.org/consumer/small-business.htm). The policy's ownership and beneficiary provisions decide. A different beneficiary setup may serve a buy-sell or personal planning purpose instead.

### Does the employee have to consent?

For employer-owned life insurance, federal tax rules call for written notice of the plan to insure, the maximum face amount, written consent, notice that coverage may continue after employment ends, and notice that the employer will receive the proceeds, according to [IRS Notice 2009-48 (opens in a new tab)](https://www.irs.gov/irb/2009-24_IRB). Connecticut and New York add their own consent rules.

### Is key person insurance the same as a buy-sell agreement?

No. Key person insurance pays the business for the loss of an essential person, while a buy-sell agreement sets the terms for buying an owner's business interest after death or disability, according to the [Connecticut Insurance Department glossary (opens in a new tab)](https://portal.ct.gov/cid/searchable-archive/library/glossary). Insurance can fund either one, but the documents do different jobs.

### Should the amount change over time?

Review it at renewal. A business that grows, changes ownership or replaces the key person may need a different amount, insured person, owner or beneficiary than the policy shows.

## Related terms