Key Person Life Insurance Policy


Key person life insurance, also known as key man insurance or key employee insurance, is an essential type of insurance that provides coverage in the event of the untimely death of a crucial individual in a business organization, typically a top executive or a key employee who possesses unique skills, knowledge, or experience. The purpose of key person life insurance is to help the company survive financially during a period of potential disruption caused by the loss of an influential figure.

To understand key person life insurance, it is essential to consider the impact that the sudden loss of a key person can have on a business. For example, suppose an entrepreneur who owns a company suddenly passes away without warning. In that case, the business may struggle as it attempts to navigate the loss of its leader, handle the loss of customers, and make arrangements for the individual’s departure and replacement. The situation can become especially dire in a small business where employees often wear multiple hats and rely heavily on the knowledge and expertise of just a few key individuals.

Who are the key people at your company?

  • Who does your business count on the most?
  • Who makes the most money for the company?
  • Who is missed the most when he/she is away?
  • Who has the most client contacts?

What can key person coverage do?

Key person life insurance is designed to help protect the financial interests of the company in the event of such a crisis. The insurance policy typically provides a lump-sum benefit payment to the company, which can be used to finance ongoing operations or help cover the costs of hiring or training a replacement for the key individual who has passed away. The coverage amount is usually based on the person's contribution to the business and is determined by factors such as their age, health status, and the nature of their role within the company. 

Another critical element of key person life insurance is that the policy's benefits are paid directly to the company, not to the individual's beneficiaries or family members. This helps ensure that the funds are used appropriately for the business's specific needs and can also help avoid any potential conflicts between the company and the deceased person's loved ones.

The instant cash liquidity provides a business with the financial flexibility to recover from this loss, no matter what the challenges present. Whether the cash is used to maintain profitability, pay loans and strengthen credit, or even pay salaries, a life insurance policy on a key person can genuinely help.

What are the tax implications of key person life insurance?

  • Death benefits should remain income tax free for the contract-owning employer, assuming compliance with IRC Section 101j had been completed.
  • Annual cash value increases for permanent life policies are tax deferred.
  • Premiums paid by the employer are not deductible for income tax purposes.
  • If the permanent policy’s cash value is used to provide supplemental retirement benefits as the result of a separate agreement, those payments may be deductible by the company as compensation.

Term or permanent key person life insurance policy?

If the key person is the business owner or partner, term life insurance is an option, but permanent life insurance may make more sense. We can help you decide which is the right fit for your organization.

In conclusion, key person life insurance is an essential type of coverage for any business that relies on the unique contributions of one or a few key individuals. By providing financial protection in the event of a sudden loss, this type of insurance can help ensure that the business can continue to thrive and succeed even during difficult times.

The financial magic of life insurance is extremely hard to beat. Please contact our agency at with your questions or for assistance with securing a key person life insurance policy.


This blog is for educational and/or informational purposes only and does not constitute tax, financial, or legal advice.

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