Key Person (Key Men) Insurance
What is key person life insurance?
Key person life insurance is a policy the business owns and pays for on the life of an essential owner or employee, with the business as beneficiary. If that person dies while covered, the death benefit is paid to the company, which may use it to steady revenue, reassure lenders, or fund the search for a replacement.
Some people are hard to replace. Some losses stall revenue, unsettle lenders, or leave a hole the business cannot quickly fill. Key person life insurance gives the company a financial cushion to steady itself.
What it is / how it works: the business owns and pays for a policy on the life of an essential person, and the business is the beneficiary. If that person dies while covered, the death benefit is paid to the company, not to the individual’s family, and the business decides how to use the funds. Common uses include:
- Covering lost revenue and keeping the lights on while the team regroups.
- Paying down business debt or reassuring lenders and investors.
- Funding the search, recruiting, and training to bring in a replacement.
Coverage can be term or permanent. Permanent policies may build cash value the business can access, which we describe as a policy feature, not an investment.
Who needs it? A founder or owner whose relationships or expertise drive much of the revenue. A top salesperson, technical lead, or partner who would be costly to replace. A business with loans or investors that depend on a specific person staying involved.
Two details decide whether the structure works. Under IRC 101(j) the death benefit on an employer-owned policy is income-tax-free only where the notice and consent requirements were met in writing before the policy was issued, and the annual reporting is kept up. Get that sequence wrong and the proceeds can become taxable to the business. Separately, premiums on a policy where the business is the beneficiary are generally not deductible, so this is funded with after-tax dollars. Your CPA should confirm both against your own structure.
How we help: we help you think through who qualifies as a key person, frame a coverage amount tied to real replacement cost, and request quotes. We coordinate with your CPA and attorney so the structure lines up with your broader plan.
