Key Person Insurance: If Your Company Loses Its Key Person

What happens to a small company if its key person is gone?

In Italy small businesses are the rule. In 2023 there were 4.617 million active businesses, and 94.8% had nine people or fewer (ISTAT, the Italian National Institute of Statistics, Italian Statistical Yearbook 2025, ch. 14).

Among businesses with at least three people, 80.9% are controlled by one person or one family; among micro-businesses the share rises to 83.3%. And those who own usually also run the business: only 1.4% of these companies are managed by a professional manager (ISTAT, Permanent Census of Businesses 2023, table 2).

This means that, in almost every small company, client relationships, dealings with the bank, technical decisions and signing authority all run through the same one or two people. If one of them is suddenly gone, the problems arrive all at once:

• revenue falls, because some clients were tied to the person more than to the company;
• costs rise, because a replacement has to be found, paid and trained;
• banks and suppliers want to know who is in charge now, and with what guarantees;
• the heirs, if the person was a partner, may be entitled to the value of the share. In a partnership, unless otherwise agreed, the surviving partners must pay it out to the heirs (art. 2284 of the Italian Civil Code) within six months (art. 2289).

The result is a cash crisis in a company that, until the day before, was doing well.

Who is the key person? Not always the owner

The key person is the one whose absence would cost the company revenue or value that is hard to recover quickly. Often it is the owner, but not only:

• the partner who handles the banks and perhaps personally guarantees the credit lines;
• the sales director to whom the main clients are tied;
• the technical specialist who knows a process, a plant or a patent better than anyone else;
• the production manager who coordinates the departments.

One question helps to identify them: if this person were gone from tomorrow, how much margin would we lose over the next eighteen months, and how much would it cost to replace them? If the answer is "a lot", they are a key person.

How does the policy work: who pays, who is insured, who receives?

Key person insurance (in Italian "polizza uomo chiave"), also known as key man insurance, is a life policy taken out by the company on a person who is essential to it. There are three roles:

1. Policyholder: the company, which signs the contract and pays the premium.
2. Insured: the key person, on whose life (and often on whose serious disability) the cover is built.
3. Beneficiary: the company. The money goes into the company's accounts and it uses it where needed: covering the lost margin, paying for the replacement, repaying a loan, buying out the share for the heirs.

The usual form is term life insurance: pure protection for a set period, with no savings element. If nothing happens during the period, the contract ends and the premiums remain a cost, as with insurance on the warehouse.

How large should the sum insured be?

There is no single formula: there are three common methods, and it pays to compare them. We apply them to an invented case: an engineering Srl (an Italian limited company) whose sales director looks after clients worth €2,000,000 of turnover a year, with a contribution margin of 25%. The director costs the company €120,000 a year and holds a 10% share.

1. Multiple of salary. A multiple of the person's annual cost: with 5, that makes €600,000. It is quick, but it does not look at the actual loss.
2. Contribution to margin. You estimate how much margin would be lost during the replacement. The director brings in €500,000 of margin a year (2,000,000 × 25%). If 30% of it were lost over eighteen months, the loss would be €225,000 (500,000 × 1.5 × 30%).
3. Replacement cost. You add up the cost of finding and onboarding the successor: in our case €30,000 for recruitment and €20,000 for training and client visits, €50,000 in total.

On top of these comes the partner's share, if the articles of association or the shareholders' agreements provide for it to be paid out to the heirs: we assume €150,000.

The figures are an example, not a recommendation. The insurer, in any case, sets the maximum sum it will insure according to the person's age, health and role.

Why should the sum insured be measured before tax?

Because the payout is taxed, but so is the margin it replaces. If the company is profitable, the lost margin would have paid IRES (Italian corporate income tax); replacement costs are deductible. For these two items, then, a payout equal to the loss leaves the company where it would have been: the tax on the payout offsets the tax it no longer pays on the lost margin.

Money that leaves the company without being a cost is different: the capital portion of a loan, buying out the share for the heirs. There, the tax on the payout has nothing to offset, and the sum insured has to be raised. With IRES at 24% (art. 77 of the Consolidated Income Tax Act) you need 100 ÷ 0.76 = €131.58 of payout for every €100 to be paid: about €1.32 per euro.

This is a simplification: the lost margin is spread over two financial years, the payout is taxed in one. If the company is making a loss, the effective tax falls. If premium and payout also count for IRAP, the regional tax calculated on the value of production (Legislative Decree 446/1997, art. 5), the multiplier for loans and shares rises a little.

Myth 1: "The premium is always fully deductible"

It is the line you hear most often, and it is not safe. To be deducted, a cost must be connected to the business activity (art. 109 of the Consolidated Income Tax Act), and on premiums for life policies on company directors the Court of Cassation, Italy's supreme court, has said no several times. The latest ruling, no. 24022 of 6 September 2024, follows earlier ones from 2009 and 2017 (FiscoOggi, the Italian Revenue Agency's magazine, 22 October 2024).

In those cases the beneficiaries were the insured person's relatives, the worst situation. But the Court wrote that the premiums are not deductible even when the payout stays with the company, because they are not aimed at producing income. Many commentators and some tax judges take a different view: the picture remains uncertain.

What reduces the risk of a challenge:

• the beneficiary is the company, never the insured person's family;
• a resolution of the board explains why that person is essential and how the sum insured was chosen;
• a sum insured consistent with the estimated loss, not out of proportion;
• pure risk cover, with no savings element that the company would get back anyway;
• no transfer of the policy to the person if they leave the role.

That is why the figures we show always give two scenarios: with the premium deducted and without.

Myth 2: "The payout reaches the company tax-free"

No. Compensation received as damages, "also in insurance form", counts as a contingent gain (sopravvenienza attiva) and is business income (art. 88, paragraph 3, letter a, of the Consolidated Income Tax Act). The rule does not link taxation to deduction of the premium: even if the premium was not deducted, the payout is still income.

Nor can it be spread over five years. Spreading in equal instalments applies to some capital gains, such as those on selling a business held for at least three years (art. 86, paragraph 4), not to the payout of a life policy: it is taxed in full in the financial year it belongs to.

The rule stays the same under the new Consolidated Income Tax Act, which applies from 1 January 2027 and moves it to article 97, paragraph 3 (Legislative Decree 117/2026, art. 377 for the start date).

What does it cost and what does it pay, after tax?

Take an annual premium of €2,500, an example figure and not a quote, for ten years, on a sum insured of €500,000. The company is a profitable Srl, with IRES at 24%.

The deduction is worth €6,000 over ten years. It matters, but the reason to take out the policy is the €380,000 that reaches the company at the worst moment.

Myth 3: "The owner's personal life policy is enough"

They are two different things. A personal life policy pays the family: it protects the spouse's and children's standard of living, has its own tax rules and does not form part of the estate (we cover it in Life insurance: when protecting becomes an act of love).

Key person insurance pays the company. With only the personal policy the family receives a lump sum, but the company is left without cash just when it has to replace the person who ran it, and heirs who are partners risk holding shares worth less. The two covers answer different questions: who protects the family, and who protects the business.

Myth 4: "With the policy, the generational handover is taken care of"

No. The policy covers the sudden event; a generational handover is prepared years in advance. Between 2016 and 2022, 9.1% of businesses with at least three people went through a generational handover, and 7.9% expected to do so between 2023 and 2025 (ISTAT, Permanent Census of Businesses 2023).

Who should lead next, how to divide the shares between the children who work in the company and those who do not, which tools to use (a will, gifts, a family pact) are choices that no payout makes for you. We cover them in Planning the generational transfer without conflict. The policy is the safety net while that plan is being built.

What should you check before signing?

1. Who the key people are, and for each one how much margin and value are at risk.
2. How the sum insured is reached: with more than one method, separating the needs that are costs (margin, replacement) from those that are not (loans, shares for the heirs).
3. Who the beneficiary is: the company.
4. The articles of association and shareholders' agreements: what happens to the insured person's share, and who has to pay for it.
5. The tax treatment, with your accountant: deduction of the premium is not guaranteed, taxation of the payout is.
6. The events covered and the exclusions: death, permanent disability, waiting periods, age limits.

With our simulator on the tax advantage of the policy you can see what deducting the premium is worth, if it is allowed; sizing the sum insured, on the other hand, is something we build together on the figures in your accounts.

Glossary

• Key person: someone whose absence would cost the company revenue or value that is hard to recover quickly.
• Policyholder, insured, beneficiary: who signs and pays for the policy, the person on whom the cover is built, who receives the money.
• Term life insurance: a pure risk policy that pays a lump sum if the insured dies within a set period; if nothing happens, the contract ends.
• Business connection (inerenza): the link between a cost and the company's activity; without it, the cost is not deductible.
• Contingent gain (sopravvenienza attiva): income the company receives outside its ordinary operations, such as compensation for damages; it is taxable.
• IRES: Italian corporate income tax, at 24%.
• IRAP: Italian regional tax on productive activities, calculated on the value of production.
• Contribution margin: revenue minus variable costs; what each sale leaves to cover fixed costs and make a profit.

Sources

• ISTAT, Italian Statistical Yearbook 2025, chapter 14 "Businesses" (active businesses and share with up to nine people, 2023) (in Italian).
• ISTAT, Permanent Census of Businesses 2023: first results, 14 November 2023, table 2 (family control, professional management, generational handover) (in Italian).
• Presidential Decree 917 of 22 December 1986 (Consolidated Income Tax Act): art. 77 (IRES rate), art. 86, paragraph 4 (spreading of capital gains), art. 88, paragraph 3, letter a (contingent gains), art. 109 (accruals and business connection) (in Italian).
• Legislative Decree 117 of 19 June 2026 (new Consolidated Income Tax Act): art. 97 (contingent gains), art. 376 (repeals), art. 377 (in force from 1 January 2027) (in Italian).
• Court of Cassation, tax section, ruling no. 24022 of 6 September 2024, as reported by FiscoOggi on 22 October 2024; it cites Cass. 28004/2009 and 19204/2017 (in Italian).
• Italian Civil Code, art. 2284 (death of a partner) and art. 2289 (payment for the share) (in Italian).
• Legislative Decree 446 of 15 December 1997, art. 5 (IRAP taxable base for companies) (in Italian).