Key person insurance is life insurance purchased by a business on the life of a critical owner, executive, or employee whose loss would significantly impact the company's profits, operations, or creditworthiness. The business is usually the policy owner, premium payer, and beneficiary, and uses the death proceeds to cover lost income, repay debts, reassure lenders, recruit and train a replacement, or provide a bridge during transition. Key person policies can be term or permanent, stand alone or combined with other strategies such as buy sell agreements, executive benefits, or collateral assignments. Properly documented, key person insurance demonstrates prudent risk management and can be an important part of overall business continuity planning.

In everyday planning, advisors recommend key person insurance after identifying individuals whose departure would create disproportionate financial strain. They quantify the risk by analyzing revenue attributable to the key person, replacement costs, outstanding loans, and potential business disruption. Lenders may require key person coverage as a condition of financing, particularly for closely held companies. Applications typically ask detailed questions about the insured's role, compensation, and ownership. Advisors also discuss the employer owned life insurance rules under IRC Section 101(j), including notice and consent requirements and potential reporting on Form 8925. Over time, coverage may be increased, decreased, or repurposed as the business evolves. By designing suitable key person insurance, producers help businesses protect value, maintain confidence during crises, and support long term succession and exit strategies for owners and executives.