The short answer
Key person insurance is life or disability cover that a business buys on an owner or essential employee, where the business usually owns the policy, pays for it and receives the money. The payout can steady the business, repay a loan or fund the search for a replacement. Related policies fund a buy-sell agreement, so surviving owners can buy a departing owner's shares. An advisor arranges it alongside your accountant and lawyer.
- Owner-managed corporations where one person drives most of the revenue
- Partners or shareholders who have, or need, an agreement with a buyout clause
- Businesses whose lender has asked for life insurance on an owner before approving a loan
- Firms that depend on one technical specialist, rainmaker or licence holder
- Family businesses planning how ownership passes if a founder dies
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01 / What it covers
The parts worth understanding
Key person life cover
The business owns a policy on the person and is its beneficiary. If they die, the payout goes to the business to cover lost profit, reassure clients and lenders, and pay to recruit and train someone new.
Key person disability cover
Pays the business, rather than the person, if the key person cannot work because of illness or injury. It can help with a temporary replacement or lost revenue, and each policy sets its own waiting and benefit periods.
Buy-sell funding
Policies that provide the money for surviving owners, or the corporation, to buy a deceased owner's shares at the price the agreement sets. The family receives value for the shares and the remaining owners keep control.
Disability buyout
A less common policy that funds the purchase of an owner's shares after a long-term disability, usually only after an extended waiting period. The agreement has to define when a disabled owner is required to sell.
Loan protection
Life cover sized to a business loan that a lender may require, sometimes with the policy assigned to the lender as security. Ask what the loan agreement actually calls for before choosing a structure.
Who owns the policy
A policy can be owned by the corporation, by each shareholder on the others, or through a holding company. Each structure changes who pays, who receives the money and how it may be taxed, which is why an accountant and lawyer belong in the conversation.
02 / Get ready
Bring this, and expect these questions
Gather
- The legal structure of the business and a list of shareholders or partners with their ownership shares
- The shareholder or partnership agreement, especially any clauses about death, disability or leaving
- Recent financial statements, which help an insurer see what the key person adds to the business
- The role, salary and responsibilities of each person you are thinking of insuring
- Business loans and lines of credit, including any an owner has signed for personally, with what each lender requires
- A recent valuation of the business, or the formula your agreement uses to set a share price
- Contact details for your accountant and lawyer, who will need to see the proposed structure
- Policies the business or the owners already hold, with who owns each one and who receives it
A broker will ask
- Who are the people the business would struggle most to replace, and why?
- What would happen to revenue, clients and staff in the months after losing that person?
- Is there a shareholder or partnership agreement, and what does it say about a death or disability?
- How is the business valued, and when was that valuation last updated?
- Has a lender asked for insurance on any owner, and on what terms?
- Would the corporation, the individual owners or a holding company own the policies?
- Have your accountant and lawyer looked at how a payout would flow and be taxed?
- Does the person to be insured know about the application and agree to it?
Not sure of an answer? Leave it. "Not known yet" is a fine answer, and a broker will help you fill it in.
03 / Build your request
Answer a few questions. Get your own list.
Pick what fits. Your answers shape the list beside them, and they are saved to your request as plain facts a broker can read. "Not sure yet" is always a fine answer.
04 / Three situations
See which one sounds like yours
Two partners in an engineering consultancy
Two founders each own half of a twelve-person consulting firm in Calgary. Their shareholder agreement says the survivor will buy the other's shares on a death, but it does not say where the money would come from, and neither could pay a fair price from savings.
First steps. Bring the shareholder agreement and the most recent valuation to an advisor, and invite the firm's accountant to the first meeting. Ask how a corporate-owned and a cross-owned arrangement would each work, how the agreed price would be funded, and whether the agreement needs updating to match.
A distributor that relies on one sales director
A family-owned wholesale distributor earns much of its revenue from accounts managed by a sales director who owns no shares. The owners worry that losing her suddenly would cost them major customers before a successor could be found and trained.
First steps. Estimate what her accounts contribute to profit and how long recruiting and training a successor would take. Ask an advisor how insurers assess a key employee's value, whether disability cover makes sense beside life cover, and how she would be asked for her consent.
A restaurant owner refinancing with the bank
The sole shareholder of two restaurants is refinancing equipment and leasehold improvement loans. The bank's commitment letter requires life insurance on the owner, assigned to the bank, before the funds are released next month.
First steps. Send the advisor the insurance clause from the commitment letter and the loan balances. Ask whether existing personal cover could be assigned or whether a new company-owned policy is cleaner, how the assignment works, and what happens to the policy once the loan is repaid.
05 / Words you will hear
The jargon, in plain words
- Key person
- Someone whose skills, relationships or leadership a business depends on so heavily that losing them would cut profit or put loans and contracts at risk.
- Buy-sell agreement
- Terms, often inside a shareholder agreement, setting out who buys an owner's shares, and at what price, when that owner dies, becomes disabled or leaves.
- Cross-ownership
- An arrangement in which each owner holds a policy on the other owners, so the survivors receive money directly to buy the departing owner's shares.
- Corporate-owned policy
- A policy the company owns and pays for, with the company as beneficiary. The payout goes to the corporation, which uses it as the agreement directs.
- Collateral assignment
- Pledging a life insurance policy to a lender as security for a loan, so the lender is repaid first from the payout if the insured person dies.
06 / Common mistakes
What trips people up
- Signing a shareholder agreement with a buyout clause and never arranging the money to fund it.
- Having the policy owned by one party while the agreement assumes another, so the payout lands in the wrong hands.
- Leaving the valuation in the agreement untouched for years while the business grows or shrinks.
- Arranging cover without the accountant and lawyer, then finding a tax or ownership problem at claim time.
- Insuring only the owners when a non-owner employee is the person the business could least afford to lose.
- Forgetting to cancel, transfer or reassign a policy after a partner leaves the business.
Ready when you are
Turn this into one clear request.
Save it, add what you know, and choose when to send it. A licensed broker who handles key person insurance takes it from there.
07 / Questions people ask
Straight answers
What is key person insurance?
It is insurance a business takes out on someone whose loss would seriously hurt it, often an owner, founder or top employee. The business usually owns the policy, pays the premiums and receives the payout, which it can use to cover lost profit, repay debt or find a replacement. It can be life cover, disability cover or both.
How much key person insurance does a business need?
There is no fixed rule. Common approaches look at what the person contributes to profit, the cost and time of recruiting and training a replacement, and any debts that depend on them. Insurers will want financial statements to support the amount. An advisor, with input from your accountant, can test the reasoning before an application goes in.
What is a buy-sell agreement and how is it funded?
A buy-sell agreement, usually part of a shareholder or partnership agreement, sets out what happens to an owner's share if they die, become disabled or leave. Insurance is a common way to fund the purchase on a death, because it provides money at the moment it is needed. The agreement and the policies have to be written to match each other.
Who owns a key person or buy-sell policy?
It depends on how the business and the agreement are structured. The corporation can own policies on each owner, the owners can own policies on one another, or a holding company can be involved. Each choice changes who pays, who receives the money and how tax may apply. Settle it with your accountant and lawyer together with the advisor.
Is key person insurance tax deductible?
Do not assume it is. In Canada, premiums for life insurance owned by a business are often not deductible, with limited exceptions such as some policies a lender requires as loan collateral. The payout has its own treatment too, including how money may later reach shareholders. The rules are detailed and change, so ask your accountant before choosing a structure.
Does the person being insured have to agree?
Generally yes. Insuring someone else's life normally requires that person's written consent and their part in the application, including answering health questions privately with the advisor and insurer. A business cannot quietly insure an employee. Talk with the person early, explain why the business wants the cover, and let them put their own questions to the advisor.
General information, not insurance advice. Broker.insure is a directory and request service: it is not an insurer and does not quote, bind or advise. Policy terms, availability and what is required where you live depend on your situation and on licensed professionals. Updated 2026-10-31.