What is key-person insurance?

• The business is the owner, payer and beneficiary of the policy.
• Coverage can be life insurance, disability insurance or both.
• Amounts are often based on lost profit, replacement cost and debt exposure.
• Premiums are generally not deductible; a corporate death benefit may credit the capital dividend account.
• Lenders sometimes require key-person coverage as a condition of financing.

Common approaches include a multiple of the key person's contribution to profit, the estimated cost and time to recruit and train a replacement, and the amount of business debt that would become due. Documenting the method matters for underwriting and for future reviews.

Key-person insurance keeps the business operating. Buy-sell insurance funds the purchase of a deceased or departing owner's shares. They solve different problems, and a company with multiple owners often needs both.

Premiums on key-person coverage are generally not deductible unless a narrow exception applies, such as certain collateral insurance required by a lender. Death benefits received by a private corporation generally credit the capital dividend account above the policy's adjusted cost basis. Confirm treatment with a Canadian accountant.

• The insured individual must consent and complete underwriting.
• Coverage should be reviewed when roles, revenue or debt change.
• Ownership structure affects tax outcomes and should be set before the policy is issued.

• Corporations — tax information for Canadian businesses — Canada Revenue Agency
• Income tax information for individuals — Canada Revenue Agency
• Life and health insurance in Canada — industry resources — CLHIA