Key person insurance: how it works, tax treatment and cost

Key person insurance is a protection policy taken out and paid for by the company, on the life of an executive or an indispensable employee, that pays a lump sum to the company itself if that person dies or becomes disabled. Premiums are tax-deductible, the payout is taxable but can be spread over five years, and the cost ranges from a few hundred to a few thousand euros a year depending on age and sum insured. It is also one of the covers investors and banks most often require before financing an SME or a scale-up in France.

What is key person insurance and who does it protect?

The key person is someone whose death or prolonged absence would cause revenue or company value to collapse: the founder who holds the enterprise-account relationships, the CTO who owns the product architecture, the surgeon in a clinic, the chef in a starred restaurant. The French tax authority defines it as anyone playing a decisive role in the business, notably someone who possesses or masters an art, a science or a technique.

Unlike a classic life policy, the beneficiary is neither the family nor the shareholders but the company, designated irrevocably. The payout absorbs the loss of business, funds the recruitment of a replacement, reassures clients and creditors, or buys back the deceased's shares if the shareholders' agreement provides for it. We covered this continuity role in our article on key person insurance for scale-ups.

How does the policy actually work?

The company chooses the person or people to insure, the sum insured and the risks covered. The base is death and total and irreversible loss of autonomy (PTIA in France), meaning the state of someone who can no longer perform any activity and needs permanent assistance for daily living. Optional extensions add total permanent disability and temporary incapacity, which trigger daily benefits after a waiting period, typically 90 days, for up to one year.

The sum insured is calculated in three ways: a multiple of remuneration (one to three years of fully loaded salary), the person's contribution to gross margin over two to five years, or the replacement cost (recruitment, transition, lost clients). Some market policies cap death cover at €50 million and disability at €5 million. Above roughly €750,000 to €1 million of cover depending on age, a medical examination replaces the simple health questionnaire.

Are key person insurance premiums tax-deductible in France?

Yes, provided the policy meets the four criteria set by tax doctrine (BOI-BIC-CHG-40-20-20): the beneficiary is the company, designated irrevocably; the insured plays a decisive role; the risk covered is the financial loss linked to death or incapacity of at least three months; the benefit is set according to the foreseeable loss of business. Premiums are then operating expenses deductible at each due date.

Conversely, if the payout goes to shareholders or heirs, the tax authority recharacterises the arrangement as additional remuneration or a gift: premiums are no longer deductible and the beneficiary is taxed. A policy taken out at a bank's request to secure a loan falls under a neighbouring regime: premiums are deductible financial charges, but the payout extinguishes the debt rather than replenishing cash.

How is the payout taxed when a claim occurs?

The lump sum received by the company is a taxable exceptional profit. To prevent an €800,000 payout from inflating corporate tax in a single year, article 38 quater of the French General Tax Code allows this profit to be spread in equal parts over five years: the year of payment and the four following. Premiums not previously deducted are spread the same way. Note that the sale or cessation of the business makes the deferred fraction immediately taxable.

Key person insurance does not replace an executive; it buys the time and the cash the company needs to survive their absence.

How much does key person insurance cost in 2026?

Price depends on the insured's age, health and occupation, on the sum insured and the covers chosen. Comparison sites published in 2026 give, for a €300,000 death benefit, the following ranges across the insurers surveyed.

Cost is almost proportional to the sum insured: covering €1 million on a 40-year-old founder costs, extrapolating from these grids, in the order of €1,000 to €4,000 a year for death and PTIA, more with incapacity. The gap between the cheapest and most expensive quote, up to fivefold for the same profile, alone justifies a competitive tender. Smoking or a hazardous occupation can double the premium; a decreasing-capital policy aligned with a loan schedule reduces it.

How much do investors and banks require?

The "key man" clause is common in term sheets and shareholders' agreements in fundraising rounds. It identifies the founders whose departure would alter the balance of the investment and often requires key person insurance to be in place before or shortly after closing. Observed amounts frequently sit between €500,000 and €2 million per founder, calibrated on the time needed to recruit a replacement and secure the next round, although investors publish no scale. It is a point to handle in the insurance review that follows a fundraising.

Banks reason differently. For a business loan, they require borrower insurance on the executive, whose payout covers the outstanding principal and is assigned to them. Key person insurance is rarely imposed but often examined: it demonstrates that EBITDA, hence repayment capacity, would survive the executive's disappearance. The two policies are complementary, not interchangeable.

Which mistakes should you avoid at underwriting?

Naming the wrong beneficiary, which destroys the tax advantage. Underestimating the sum insured to save a few hundred euros of premium: €100,000 does not cover six months of lost revenue for a €3 million SME. Forgetting to revise the policy when a key person leaves or the company grows. Finally, failing to coordinate the policy with the shareholders' agreement, directors' and officers' liability and group protection, which answer different needs.

Frequently asked questions

Who can be insured as a key person?

Anyone whose absence would cause a measurable financial loss: executive, partner, technical or sales manager, healthcare professional. Being a corporate officer is not required, and several people can be insured under one policy.

Is key person insurance mandatory?

No, no statute requires it. It may however be required by a shareholders' agreement, a term sheet clause or, more rarely, a loan agreement. It is a management decision.

Is the payout subject to social security contributions?

No. The lump sum is received by the company, not by an individual; it is subject to corporate tax (or income tax for businesses under the actual regime), with the five-year spreading option, but not to social contributions.

What happens if the key person leaves the company?

The policy loses its purpose: the company can cancel it, transfer it to another person if the insurer agrees, or, under some policies, convert it into individual cover for the insured, who then takes over the premiums.

At Lesto, we start by identifying with you the people who are truly indispensable and by quantifying the loss their absence would cause, before consulting nine insurers on average to obtain the cover your investors expect at the best rate, with policy wording that secures deductibility. Preparing a round or a financing? Discover our key person insurance offer and get an analysis within 72 hours.