Key person life insurance is insurance purchased on the life of an employer or owner of a company. The intent is to cover expenses incurred as a result of the death of a key employee. Key person insurance is needed if the sudden loss of a key executive would have a large negative effect on the company's operations. The payout provided from the death of the executive essentially buys the company time to find a new person or to implement other strategies to save the business. The company is the beneficiary of the plan and therefore pays the insurance policy premiums.

Some examples are: lost sales or revenue, hiring of interim staff until a permanent replacement is found, costs associated with hiring and training a replacement employee.

Key person insurance has several advantages: (1) enhances the ability of the business to continue operations; (2) fosters smooth sale of a going business between an estate and a purchaser by providing funds to buy out the interest of a deceased key person; (3) encourages key employees to stay on the job; (4) attracts new key employees; (5) provides funds for expenses of hiring and training of a replacement key employee; (6) provides a line of credit (A permanent life insurance policy has cash values that are available for loans at advantageous rates.); (7) policy proceeds, which are income free, are payable even if the key person is no longer in the employ of the business at the time of death; however, the business must continue to make the premium payments after the key person leaves the employment.

Term life insurance is generally appropriate for key person insurance as the insurance may only be required until the retirement of the employee. Occasionally the insurance policy is provided to the employee upon their retirement at which point they could convert it to permanent insurance (depending upon the policy).