Which type of life insurance is used to lessen a business's risk by protecting against the loss of a key employee?

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Protecting a business against the financial impact of losing a key employee is what key person insurance is designed to do. In this arrangement, the business owns the policy and is the beneficiary. If the key employee dies or becomes disabled, the payout helps the company cover the resulting losses—replacing the person, funding recruitment and training, handling outstanding debts, or financing a buyout of ownership interests—so the business can ride through the disruption and maintain stability.

This differs from term life, which protects an individual for a set period and isn’t specifically tied to the business’s ongoing needs. Permanent life provides lifetime coverage for an individual but doesn’t address business continuity after the loss of a key person. An executive bonus plan is a way to compensate an employee and encourage retention, not a dedicated mechanism to insure the business against the financial risk of losing that employee.