Key Person Life Insurance in Canada: What It Is and Why Businesses Use It
Introduction
Many Canadian businesses depend heavily on one or two individuals whose knowledge, relationships, or leadership are critical to daily operations. When something unexpected happens to a key person, the financial impact on the business can be significant.
Key Person Life Insurance is designed to help businesses manage that risk.
In this article, we’ll explain what Key Person Life Insurance is, how it works in Canada, and when it may — or may not — make sense as part of a business protection strategy.
What Is Key Person Life Insurance?
Key Person Life Insurance is a type of life insurance policy where:
- A business owns the policy
- A key individual is the life insured
- The business is the beneficiary
If the insured individual passes away, the business receives the insurance proceeds. These funds can help the company remain stable during a difficult transition.
Why Businesses Use Key Person Life Insurance
The loss of a key individual can affect a business in many ways. Insurance proceeds are often used to help cover:
- Lost revenue or reduced productivity
- Recruitment and training costs
- Loan obligations or creditor requirements
- Business continuity during a transition period
- Time needed to restructure or sell the business
The goal is not to replace the person — but to protect the business while it adapts.
Who Is Considered a “Key Person”?
A key person is someone whose absence would materially impact the business. This may include:
- A founder or co-founder
- A business partner
- A top revenue-generating employee
- A highly specialized professional
- A person essential to client or supplier relationships
Each business defines “key” differently, based on dependency and risk.
How Key Person Life Insurance Is Structured in Canada
In a typical Canadian structure:
- The business pays the premiums
- The policy is owned by the business
- The business is the beneficiary
- Coverage amount reflects financial exposure, not income alone
Policies may be term or permanent, depending on the business’s goals and time horizon.
Tax treatment can vary depending on policy type and structure, so proper design and advice are important.
When Key Person Insurance May Make Sense
Key Person coverage is commonly considered by:
- Small and mid-sized businesses
- Professional corporations
- Partnerships
- Growing companies with concentrated responsibility
- Businesses with lender requirements
If the success of the business depends heavily on specific individuals, the risk is worth addressing.
When It May Not Be Necessary
Key Person insurance may be less relevant when:
- The business has low dependency on any one individual
- Operations are easily transferable
- The company is winding down
- The cost outweighs the potential exposure
Not every business needs it — suitability matters.
Key Person Insurance vs. Buy-Sell Insurance
These two are often confused.
- Key Person Insurance protects the business from financial disruption
- Buy-Sell Insurance funds ownership transitions between partners
They serve different purposes and are sometimes used together, depending on the situation.
The Role of Life Insurance in Business Planning
Key Person Life Insurance is fundamentally about risk management, not investment or tax optimization.
A well-designed policy:
- Addresses a real business exposure
- Aligns with the company’s structure and goals
- Fits within a broader continuity plan
- Is reviewed as the business evolves
Clarity and simplicity are usually better than complexity.
Final Thoughts
Key Person Life Insurance is one of the most straightforward ways Canadian businesses can protect themselves against the unexpected loss of a critical individual.
It doesn’t replace leadership or talent — but it can provide the financial stability needed to move forward during a difficult period.
Understanding the concept is the first step toward making an informed decision.