What Should You Check Before Buying Key Person Insurance?

Before buying key person insurance, determine whether losing a particular person could create a material financial problem for your business and whether insurance is an appropriate way to prepare for that risk. The decision depends on the person’s role, the disruption their absence could cause, the proposed coverage purpose, and whether the business can maintain the arrangement.

Key person insurance is not a substitute for succession planning, emergency financing, or operational continuity planning. It is one possible part of a broader risk discussion, and the details must be assessed against your circumstances and the policy being considered.

Quick summary

• Identify the person whose absence could create a significant operational, financial, or relationship problem.
• Define the business problem the coverage is intended to address before discussing an amount.
• Confirm policy-specific details about ownership, premiums, beneficiaries, proceeds, and covered events.
• Compare the proposed protection with the business’s actual risk and ability to sustain it.
• Prepare information about your business, existing coverage, and continuity plans before requesting advice.

1. Is the person genuinely key to the business?

A job title does not, by itself, make someone a key person. The more useful question is what would happen if that individual were suddenly unavailable. Consider whether their absence could affect revenue, client relationships, decision-making, technical delivery, supplier access, or daily operations.

Possible examples include an owner, partner, technical specialist, major salesperson, or person who manages important customer relationships. These are illustrations, not automatic qualification categories. A smaller business may depend heavily on one person, while a larger organization may have systems that reduce dependence on any individual.

• Which responsibilities would be difficult to transfer immediately?
• Who holds knowledge, credentials, relationships, or authority that others do not?
• Could another employee take over, or would recruitment and training be substantial?
• Would customers, lenders, suppliers, or partners react to the person’s absence?
• Is the business dependent on the person’s work, reputation, ownership interest, or relationships?

2. What business problem would their absence create?

Do not begin with a coverage amount before defining the exposure. Write down the specific financial and operational consequences you want to prepare for. This creates a clearer basis for a broker discussion than simply describing someone as essential.

Depending on the role, the problem could involve interrupted revenue, delayed projects, lost customer relationships, recruitment and training costs, reduced production capacity, or pressure on remaining owners. It could also raise questions about debt obligations, ownership transition, or the time needed to restore normal operations. Not every business will face all of these risks.

Separate immediate disruption from longer-term consequences. A salesperson’s departure may create client-continuity concerns, while a technical specialist’s absence may affect delivery or knowledge transfer. An owner’s absence may also require decisions about management authority and ownership, which should be reviewed with appropriate professional advisers.

3. What would the coverage be intended to support?

Define what financial flexibility the business would want if the relevant event occurred. Potential purposes might include supporting transition costs, funding recruitment and training, creating time to stabilize operations, or addressing disruption to business activity, subject to policy terms and professional advice.

Write the intended purpose in plain language, such as: “We want financial flexibility while we replace a specialized role.” A clear purpose helps you assess whether the proposed coverage is relevant and whether the amount being discussed connects to a real business need.

Do not assume insurance proceeds will replace all lost revenue or solve every continuity problem. The policy’s terms, covered event, benefit structure, and business circumstances all matter. Ask the broker to explain how the proposed arrangement relates to the purpose you have documented.

4. Does the proposed coverage match the risk?

Two common decision risks are buying too little coverage and buying more than the business can justify or sustain. Too little may leave the business without enough financial flexibility, while excessive coverage may divert resources from other priorities.

Confirm what type of event and benefit are actually being considered. Do not assume every key person insurance arrangement includes life, disability, or critical illness protection. Those are policy-specific questions that must be answered for the proposed product and structure.

• What risk is the proposed policy designed to address?
• What event would trigger a benefit?
• How was the proposed amount connected to the business problem?
• What important risks would remain outside the arrangement?
• Would the protection still make sense if the business changed direction?

5. Have you clarified ownership, beneficiaries, and proceeds?

Ownership and proceeds are central structural questions. Ask who would own the policy, who would pay premiums, who may receive a benefit, and how the business expects the money to be used if a covered event occurs.

The answers can be affected by the business structure and relationships among owners, partners, shareholders, and employees. Ask the broker to explain the proposed arrangement in writing and identify questions that should also be reviewed with legal, tax, or accounting professionals. Do not rely on general assumptions about tax treatment, deductibility, accounting, or beneficiary rights.

6. Can the business maintain the arrangement?

An arrangement that looks affordable initially still needs to fit the business’s longer-term priorities. Consider whether the business could continue paying premiums during a slow period, after an ownership change, or when other investments become necessary.

Consider how the person’s value and responsibilities may change. A business may become less dependent after hiring another specialist or documenting key processes. Conversely, growth may increase dependence on an owner or relationship-holder. Pricing is individualized and depends on coverage needs and risk factors, so there is no universal price or amount for every Ontario business.

7. What happens if the person or business changes?

Ask when the arrangement should be revisited and which changes should trigger a conversation. Relevant changes may include a departing employee, a new partner, a change in ownership, a substantially different role, business growth, a merger, or new coverage elsewhere.

Keep a simple record of the policy’s intended purpose, the person’s role when it was arranged, and the business changes you want to report. This makes future discussions more focused and helps preserve the original rationale.

Key person insurance is not the same as broader business insurance

Business insurance and key person insurance address different questions. Broader commercial coverage may relate to property, liability, operations, or other business risks, while key person insurance focuses on the financial effect of dependence on a particular individual. One should not automatically be treated as a substitute for the other.

When discussing coverage, explain that your concern is dependence on a specific person so the conversation distinguishes that concern from other commercial risks.

How the decision can differ by role

Owner or partner: Ask how the person’s absence could affect management, decision-making, ownership relationships, and continued operations. The discussion may need to sit alongside continuity and ownership planning.

Technical specialist: Focus on specialized knowledge, project delivery, documentation, recruitment, and training. Consider whether the business has a realistic backup.

Salesperson: Examine customer relationships and revenue activity associated with the role. Ask how accounts would be managed during a transition.

Relationship-holder: Consider a person whose value comes from trust with clients, suppliers, lenders, or partners. The relevant questions may involve communication and the time needed to establish replacement relationships.

These scenarios are illustrations only. A role does not automatically justify key person insurance. The business must connect the individual’s importance to a specific exposure and intended purpose.

What to prepare before requesting a quote or consultation

These are preparation prompts, not universal insurer requirements:

• Business structure: Note the organization’s structure and identify ownership and management.
• Person’s role: Describe responsibilities, specialized knowledge, relationships, and authority.
• Business dependency: Record what could be disrupted, including revenue, projects, operations, customers, or decisions.
• Existing protection: Gather relevant insurance and other arrangements already in place.
• Continuity planning: Note backup staff, documented processes, succession plans, or emergency financing.
• Intended use: Explain what financial flexibility the business wants and why.
• Affordability: Consider what the business could maintain if revenue or priorities changed.
• Questions: List concerns about ownership, premiums, beneficiaries, proceeds, covered events, exclusions, and reviews.

Why a quote should be treated as a tailored assessment

A quote is not a universal answer to whether key person insurance fits your business. It is part of an assessment that should connect the proposed coverage with the person’s role, business exposure, intended use, and ability to maintain the arrangement.

When comparing options, ask whether each proposal addresses the same purpose and type of risk. A lower premium may reflect a different scope or structure. Compare clear explanations of purpose, scope, sustainability, and policy terms rather than price alone.

Frequently asked questions

Does every small business need key person insurance?

No. The relevant question is whether dependence on a particular person could create a material financial problem if that person were unavailable. Some businesses have concentrated dependence, while others have shared responsibilities or documented processes that reduce the impact.

How can a business identify whether someone is a key person?

Look beyond title and compensation. Consider who controls important knowledge, customer relationships, revenue activity, technical capability, operational decisions, or ownership responsibilities. Then assess what would be disrupted and how quickly another person could take over.

Is key person insurance the same as business insurance?

No. Broader business insurance addresses other categories of commercial risk, while key person insurance focuses on the financial consequences of dependence on a particular individual. The exact protection depends on the policy and arrangement.

What information should a business owner prepare?

Prepare the business structure, the person’s responsibilities, consequences of their absence, existing coverage, continuity arrangements, intended use of any benefit, and questions about ownership and affordability. Some questions may require legal, tax, or accounting advice.

Make the decision around the business risk

The strongest starting point is not a policy amount or price. Identify the person the business depends on, describe the financial problem their absence could create, define the proposed protection, and confirm policy-specific ownership and proceeds details. Then test whether the arrangement remains affordable and relevant as the business changes.

Chase Insurance Brokers Ltd. is an Ontario-based brokerage serving businesses across Ontario, including the GTA, with customized, quote-based guidance. Business owners can request an insurance quote or schedule a meeting to discuss their circumstances.