What is key person insurance and how does it support business succession planning in Ontario?

Key person insurance is a policy the business itself owns on the life of an owner, founder, or employee whose skills, relationships, or expertise are critical to the company, with the payout going to the business rather than to that person's family or estate. It's a different tool from the life insurance used to fund a buy-sell agreement: buy-sell insurance pays for a share purchase, while key person insurance gives the business cash to absorb the shock of suddenly losing someone central to its operations.

In a succession context, that cash can cover the cost of recruiting and training a replacement, keep the business afloat while a transition plan plays out, reassure lenders or suppliers who might otherwise worry about the company's stability, or buy the business time to bring a successor up to speed properly instead of rushing the handover. It's particularly relevant for a founder-led or family business where one person holds most of the institutional knowledge and client relationships. Deciding how much coverage makes sense, and coordinating it with any buy-sell or shareholder agreement already in place, is worth doing with an insurance advisor and a lawyer together so the pieces work as a coherent plan rather than leaving gaps.