Key person insurance for the people your business runs on
When an owner, top producer or technical lead dies or becomes disabled, revenue, credit and customer confidence can all take a hit at once. Key person coverage pays the business, so it has cash to steady operations, replace talent and keep lenders comfortable.
Coordinated with your CPA and attorney
Who counts as a key person?
A key person is anyone whose loss would cost the business real money. The test is economic, not a job title.
Owner-operators
Owners who hold the customer relationships, the bonding capacity or the lender's confidence.
Top producers
Sales leaders or estimators whose book of business would be hard to replace quickly.
Technical experts
Engineers, master technicians or licensed qualifiers the business needs to operate or bid work.
Relationship holders
People who carry key accounts, vendor terms or a referral network personally.
Personal guarantors
Owners who personally guarantee loans, leases or surety indemnity agreements.
Small leadership teams
Companies where two or three people make most decisions and there is no bench yet.
What a key person loss can cost
Round, illustrative numbers to show how the need is sized. Your figures come from your own financials.
A distributor loses its top salesperson
The company's sales manager, responsible for about a third of gross profit, dies unexpectedly. Several accounts go out to bid while a replacement is recruited and ramps up.
- Gross profit lost over 18 months$600,000
- Recruiting and signing costs$100,000
- Training and overlap$50,000
- Line-of-credit paydown requested by bank$250,000
Illustrative example. Real outcomes depend on the facts and your policy terms.
How much key person coverage is enough?
There is no single formula, and insurers will ask for a reasonable financial justification before they issue a large policy. Most businesses combine a few approaches:
- Contribution to profit: the gross profit the person generates, multiplied by the number of years it would realistically take to replace it.
- Replacement cost: recruiting fees, signing incentives, a higher salary for an experienced hire and the cost of overlap and training.
- Debt and guarantees: loan balances, lines of credit and lease obligations the person guarantees or the lender ties to them.
- Multiple of compensation: a simpler starting point that many carriers use as an underwriting guideline.
Revisit the amount when revenue, debt or the person's role changes. A policy bought five years ago may no longer match the business.
Tax rules to get right before you apply
These are general points to review with your CPA, not tax advice.
- Premiums: the IRS does not allow a business to deduct premiums on life insurance covering an officer, employee or other person with a financial interest in the business when the business is directly or indirectly the beneficiary.
- Death benefit: for employer-owned policies issued after August 17, 2006, IRC section 101(j) generally makes the death benefit taxable above the premiums paid unless notice and consent requirements are met and an exception applies, such as the insured being a director or highly compensated employee when the policy was issued.
- Notice and consent: before the policy is issued, the employee must be told in writing that the employer intends to insure them, the maximum face amount and that the employer will be a beneficiary, and must consent in writing, including to coverage continuing after they leave.
- Annual reporting: businesses that own employer-owned life insurance contracts issued after August 17, 2006 file IRS Form 8925 with their return each year.
A missing consent form cannot be fixed after the insured has died, so we build the notice and consent step into the application process.
Setting up key person coverage, step by step
Identify the people and the exposure
We look at who drives revenue, holds relationships or guarantees debt, and what their loss would cost over a realistic recovery period.
Choose life, disability or both
Death is only one risk. Many owners are more likely to face a long disability during their working years, so we often look at key person disability alongside life coverage.
Complete notice and consent
The insured signs the written notice and consent before the policy is issued, and your CPA confirms which section 101(j) exception applies.
Apply and underwrite
The business applies as owner and beneficiary. Underwriting covers the insured's health and the financial justification for the amount.
Coordinate with the rest of the plan
Key person coverage protects the company. If the goal is to buy out an owner's family, that belongs in a funded buy-sell agreement, and the two should be designed together.
Review it regularly
We revisit amounts, ownership and beneficiary designations as people, debt and the business change, and when someone leaves.
Term or permanent key person coverage?
The right choice depends on how long the business will depend on the person.
Term life
- Lower premium for a large amount of coverage
- Fits a defined need, such as a loan term or the years until a planned succession
- No cash value; coverage ends at the end of the term
- Many policies allow conversion to permanent coverage within a set period
Permanent life
- Higher premium, coverage designed to last
- Cash value becomes an asset of the business
- Can later be repurposed, for example to help fund a buyout or retirement benefit
- Policy design and guarantees vary by carrier
Key person insurance FAQ
Who owns the policy and who is the beneficiary?
Are the premiums tax-deductible?
Is the death benefit tax-free to the business?
Can we insure someone without telling them?
What happens to the policy if the key person leaves?
Does key person insurance replace a buy-sell agreement?
Is there key person disability coverage?
Talk through your key person exposure
A short conversation is usually enough to identify who is key, how much coverage makes sense and what your CPA needs to see. We compare carriers and handle the paperwork.
Content on this page is a general summary for education. It is not tax, legal or investment advice, a statement of coverage, an offer or a binder. Scenarios and dollar figures are illustrative examples, not representations about any person or business. Tax figures reflect 2026 federal and Washington rules as we understand them and can change. Consult your tax advisor and attorney before acting. Policy features, conversion rights and guarantees vary by carrier and contract, are subject to underwriting and the terms of the policy issued, and are backed by the claims-paying ability of the issuing insurer.