Key person insurance
Life insurance a business owns on someone it can't easily replace.
About a 5-minute read
What it is
The business buys, owns and is the beneficiary of a life insurance policy on an owner or key employee. If that person dies, the business receives the benefit to help it through the transition.
Who it's often for
Businesses that depend on a founder, top salesperson, specialist or manager whose loss would hurt revenue, relationships or credit.
How it works
Scene 1
The flow at a glance
- 1The business identifies the key person and estimates the financial impact of losing them.
- 2With the person's written consent, the business applies for and owns the policy.
- 3The business pays the premiums.
- 4If the key person dies, the benefit goes to the business to replace lost profits, recruit and train a replacement, reassure lenders or pay down debt.
Common ways to size coverage
A multiple of the person's compensation, their contribution to profits, or the cost to replace them. Many businesses combine approaches.
What to watch out for
- Premiums are generally not tax-deductible.
- For the death benefit to be generally income-tax-free to the business, federal notice-and-consent rules for employer-owned life insurance must be met before the policy is issued.
- Coverage should be reviewed as the person's role and the business's value change.
- Disability can hurt a business as much as death; key person disability coverage is a separate product.
Questions to ask before moving forward
- What would losing this person actually cost us?
- How long would it take to replace them?
- Term or permanent?
- Do we meet the notice-and-consent requirements?
Who else should be involved
Your CPA (tax treatment and reporting), and your attorney if the policy ties into other agreements.
Related concepts and services
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Book a ConversationAdvanced concepts are described in general, simplified terms for education only. They involve legal, tax and financial considerations that depend on your situation and on current law, which can change. IAM Money Management does not provide tax or legal advice; consult your attorney and tax professional before implementing any strategy. Life insurance and annuity products are issued by insurance carriers, and features, costs and guarantees vary by carrier, product and state. Guarantees are backed by the claims-paying ability of the issuing carrier.