David Lee Roth Paternity Insurance: What the Van Halen Story Really Teaches Small Business Owners About Key Person Risk

David Lee Roth has a favorite insurance story, and it isn’t fit for a family website. The cleaned-up version: in the late 1970s, while Van Halen’s people were arranging coverage on Eddie Van Halen’s fingers and Alex Van Halen’s elbows before a big tour, Roth asked whether a certain other part of his anatomy deserved a policy too. Rock legend turned that joke into “paternity insurance.” The punchline is funny. The part before the punchline is a lesson most small business owners never learn.

What Actually Happened (and What Didn’t)

The internet version says Roth bought a $1 million Lloyd’s of London policy to protect himself from paternity suits. Roth has told the story himself, most famously in a 2013 HuffPost Live interview, and his version is about a band insuring its working parts before going out on the road, with the singer adding his own wisecrack to the list. Whether an underwriter ever wrote that last policy is anyone’s guess. Nobody has produced one.^[1]

Today, big tours formalize this with non-appearance insurance, which pays when a headliner can’t perform because of death, accident, illness or certain travel delays. Lloyd’s of London is still the center of that market, and policies are underwritten on the performer’s age and health history, much like a key person policy.^[2] What those policies won’t pay for is a no-show the artist chose. Remember that; it matters later.

What Is Key Person Insurance?

Key person insurance (also called key man or key employee insurance) is coverage a business buys on someone whose death or disability would seriously hurt revenue, operations or the ability to repay debt. The business owns the policy, pays the premium and receives the benefit. The money is the company’s to use: covering lost profit, recruiting and training a replacement, reassuring a lender, or buying time to sell or wind down.

It is not the same thing as personal life insurance, which protects your family. Most owners need both, and neither one is part of a standard business owner’s policy or commercial package.

Who Is Your Eddie Van Halen?

Every small business has at least one person whose hands are on the revenue. Ask a blunt question: if this person were gone for six months, starting tomorrow, would the business still make payroll?

• The owner-rainmakerBrings in most new business through personal relationships.
• The top producerCarries a book of clients who follow the person, not the logo.
• The licensed specialistThe engineer, dentist, CPA or master technician you can’t replace in 90 days.
• The face of the accountThe one name your biggest client calls.
• The keeper of the keysThe only person who really knows how the back office, the software or the supplier deals work.
• The personal guarantorThe person whose signature is on the loan.

If a name came to mind, that’s your key person. The next question is which kind of loss you’re protecting against.

The Five Coverages Owners Confuse

“Key person insurance” gets used as a catch-all. In practice it’s a family of policies, each built for a different problem, with different tax treatment. This is the general picture; your CPA should confirm how it applies to your entity.^[4][5]

Key person disability is the one most owners skip and most need. Policies typically pay a monthly benefit for a set period, commonly 12 to 24 months, or a lump sum, after a waiting period you choose.^[6] A longer waiting period lowers the premium; it also means the business carries the first stretch on its own.

The “Paternity” Question: What Insurance Won’t Do

Here’s where the Roth legend turns useful. Insurance pays for sudden, involuntary losses. A planned absence, like parental leave, a sabbatical or a scheduled elective procedure, isn’t something a key person policy covers, for the same reason a tour’s non-appearance policy won’t pay when the band simply decides not to show up.

So if you’re an owner with a baby on the way, insurance isn’t the plan. The plan is the business itself:

• Cross-train early. Pick the one or two people who can run client meetings and approve spending while you’re out.
• Front-load the pipeline. Close or hand off what you can before the leave starts.
• Build a cash cushion sized to two or three months of fixed costs.
• Write the “if I’m unreachable” memo: passwords, vendor contacts, who signs what.

Then use key person life and disability for what they’re built for: the call nobody plans to get.

Your Lender May Already Require It

If your company has or wants an SBA loan, this may not be optional. Under the SBA lending guidelines that took effect in June 2025 (SOP 50 10 8), lenders generally must require life insurance, assigned to the lender as collateral, when a business depends on one or a few key people to repay.^[7] The coverage usually tracks the loan amount and term, and the requirement can be reduced when other collateral is strong. Conventional lenders set their own rules, and many follow similar logic. Read your loan agreement before your lender reminds you.

The Tax Trap Most Owners Don’t Hear About

Two rules decide whether key person life insurance does its job:

1. Premiums aren’t deductible. When the business is the beneficiary, Internal Revenue Code §264(a)(1) bars the deduction, even though the coverage is a legitimate business expense.^[5]
2. The death benefit is tax-free only if the paperwork comes first. Under §101(j), for employer-owned policies issued after August 17, 2006, the insured employee must receive written notice and give written consent before the policy is issued, and the business must file IRS Form 8925 each year. Miss the notice and consent, and much of the death benefit can become taxable income.^[4]

A policy a sole proprietor owns on their own life isn’t treated as employer-owned insurance under these rules.^[8] If you already own a key person policy, ask whoever set it up whether the consent form exists and where it’s filed.

How Much Coverage? A Worked Example

Picture a three-person landscape architecture firm in Winter Park with about $650,000 in annual revenue. The owner personally brings in roughly 80% of new work, runs at about a 45% gross margin, and has a $150,000 equipment and build-out loan. One straightforward way to size coverage is to estimate the profit at risk while the business replaces or rebuilds around the owner, then add the debt:

Other common methods are a multiple of the key person’s compensation or the cost to recruit and ramp a replacement. Underwriters will want to see the reasoning, so a number you can explain beats a round number you can’t. Price depends on the person’s age, health, the benefit amount and the term; that’s why a real quote beats any estimate on a blog.

Getting Started in Three Steps

1. Name the person and the role.Write down what they do, what share of revenue or operations they touch, and what breaks first if they’re out for 90 days.
2. Gather the paper.Last 12 months of financials, any loan or buyout agreements, and any existing life or disability policies, business or personal.
3. Talk to an independent agent.Key person policies are underwritten one person at a time. An agent who works with multiple carriers can compare life, disability and overhead options side by side and coordinate the §101(j) paperwork with your CPA. Contact Orca to start.

Frequently Asked Questions

Van Halen insured the hands that made the music. Every business has a pair of hands like that.

The Bottom Line

Strip away the legend, and the Van Halen story is a lesson in honest accounting: figure out who the business can’t run without, put a number on that dependence, and protect it before you need to. Then do the band’s other trick and actually read the fine print, because the brown M&M is usually hiding in a contract you already signed.