What Is Key Person Insurance – And Does My Business Need It?
- Andrew Russell
- Sep 12
- 3 min read
Updated: Nov 5
Running a business is full of what-ifs. What if your top performer suddenly can’t work? What if a co-founder or key partner falls ill? For many businesses, these “ifs” aren’t just theoretical; the impact can be huge. That’s precisely why key person insurance is worth understanding and in many cases, getting.
What Is Key Person Insurance?
Key person insurance (or “key man” insurance) is a protection policy taken out by a business on the life (or critical illness) of someone whose loss would hit the company hard. That might be a founder, top salesperson, specialist, partner or anyone whose skills, relationships or knowledge are integral to day-to-day operations or long-term strategy.
The business is the policy owner, pays the premiums, and receives the payout if the insured key person dies or suffers a defined serious illness.
Why It Matters
If the person in that key role suddenly isn’t there, your business might face:
Disruption of revenue: clients could be lost, sales delayed
Higher costs: recruiting, retraining, or outsourcing to cover gaps
Damage to reputation or investor confidence
Cashflow pressure, especially if there are debts, loans or partners depending on that individual
Key person insurance helps cushion those blows, giving you financial breathing room to keep things going, restructure, or recruit appropriately.
Who Should Think About It
You should especially consider key person insurance if:
Your business depends heavily on one or a few individuals (skills, sales, leadership).
You’ve taken on loans or investments that assume continuity.
The loss of that person would put debts, supplier relationships, or contracts at risk.
You don’t yet have a succession plan or the cost/timing of replacing them would be difficult.
Even in businesses that seem to have redundancy built in, sometimes the intangible value of deep relationships or specialist knowledge means there’s still vulnerability.
How Much Cover Is Right?
There’s no one-size-fits-all, but common approaches include:
Revenue or profit impact method: What would the financial hit be over 6–24 months if that person were gone?
Replacement cost: How much would hiring, training, paying someone else cost?
Debt / liability coverage: Ensuring key person insurance helps settle obligations tied to that person (loans, contracts).
You’ll want to work through the numbers with experienced advice, ensuring the policy is enough to plug the gaps, but not so large premiums become a burden.
Key Person Insurance at The Protection Guy
At The Protection Guy, we help business owners assess whether key person cover suits their situation and if so, how much, and what kind. We do this as part of our Business Protection offering, which includes Key Person, Shareholder & Executive Protection. We’re independent, fee-free, and whole-of-market so our advice is always about what’s best for your business, not what’s easiest to sell.
You can learn more about our business protection plans here: Business Cover – The Protection Guy.
Bottom Line: Do You Need It?
If the sudden loss of one person could compromise your business, perhaps to the point of financial distress, then yes, key person insurance is something you should seriously consider.
It’s not just about covering risk; it’s about enabling stability and giving your business a chance to respond rather than being caught flat-footed. And by bringing in expert, independent advice (with no pressure or hidden fees), you can decide with confidence what’s right for you.
The information in this article is for guidance only and should not be taken as financial advice. Policies vary between providers, and the right choice will depend on your individual circumstances. Always speak with a qualified adviser before taking out any form of protection insurance.
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