Guides> Key Person Insurance
Key Person Insurance: complete guide 2026
Key person insurance protects the business against the financial loss caused by the death or disability of a person essential to its operations.
Who Is a Key Person?
A key person is someone whose absence would cause significant financial harm to the business:
• Founder or chief executive • Sales person responsible for a significant share of revenue • Developer or engineer with unique expertise • Licensed professional whose credentials generate revenue (physician, lawyer, accountant) • Anyone who is difficult to replace in the short term
Identifying key persons is the first step in the analysis. Ask the question: "If this person were gone tomorrow, what would be the financial impact over the next 2–3 years?"
Coverage Amount Calculation
Several methods can be used to determine the coverage amount:
• Multiple of income: 5 to 10 times the key person's annual compensation • Profit loss: estimated reduction in profits during the replacement period (generally 2–3 years) • Replacement cost: recruitment fees, training, lost productivity, client impact • Revenue contribution: if the person manages 40% of revenue, cover 2–3 years of that revenue
The profit loss method is generally the most defensible and most accurate.
Tax Treatment
For key person insurance held by the corporation:
• Premiums: generally NOT deductible (capital expenditure, not a current expense) • Death benefit: received tax-free by the corporation • CDA credit: the difference between the death benefit and the ACB is credited to the Capital Dividend Account
Caution: if the CRA determines that the policy actually protects the shareholder's personal interests rather than the business, premiums could be treated as a taxable benefit. Clearly document the link between the coverage and the business risk.
Key Person vs Shareholder Buy-Sell Insurance
The two products serve different purposes:
• Key person insurance: indemnifies the BUSINESS for the financial loss. The business is the beneficiary and uses the funds to survive the transition. • Buy-sell insurance: funds the purchase of the deceased shareholder's SHARES. The funds are used to pay the estate.
A shareholder can be both a key person AND have their shares covered by a buy-sell agreement. Both policies are distinct and address different needs.
In practice, many businesses neglect key person insurance and only cover the share buyout. This is a gap the advisor should raise.
Frequently Asked Questions
How do you determine the coverage amount?
Estimate the financial impact over 2–3 years: lost revenue, recruitment costs, training, loss of clients. A simplified rule is 5–10 times the key person's annual compensation.
Are premiums deductible for the business?
Generally no. Key person insurance premiums are a capital expenditure and not deductible. However, if the policy is assigned as collateral for a loan, the NCPI portion may be deductible.
What is the difference between key person and shareholder buy-sell insurance?
Key person insurance indemnifies the business for the financial loss. Buy-sell insurance funds the purchase of the deceased shareholder's shares. Both are distinct and often necessary for the same individual.
Term or permanent for key person coverage?
Term is generally sufficient because the need diminishes over time (as the business diversifies its dependency). A T10 or T20 is common. Permanent coverage may be justified if the person will always be key (e.g., founder-owner).
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Résumé en français :Guide sur l'assurance personne clé au Québec. Couvre qui est une personne clé, les méthodes de calcul du montant de couverture, le traitement fiscal des primes et du capital-décès, et la distinction avec l'assurance de convention entre actionnaires.