Key Person Insurance

Key person life and disability insurance helps a business absorb the loss of an owner or critical employee. Learn how coverage amounts, ownership, and Section 101(j) compliance work.

Some businesses depend on one or two people for revenue, client relationships, credit, or technical expertise. Key person coverage is designed to give the business capital to recover if that person dies or becomes disabled.

What key person coverage does

The business owns the policy, pays the premium, and is the beneficiary. Proceeds can be used for whatever the business needs: recruiting and training a replacement, offsetting lost revenue, reassuring lenders, or stabilizing cash flow during a transition.

Key person life insurance addresses death. Key person disability insurance, offered by a narrower group of carriers, pays the business a benefit, often for a limited period, if the insured becomes disabled under the policy's definition.

Determining a reasonable amount

Carriers will ask how the amount was determined. Common approaches include a multiple of the person's compensation, an estimate of their contribution to profit, the cost of replacing them, or the amount of business debt they personally guarantee. Insurers limit coverage to amounts they consider financially justified.

Tax and compliance

Premiums are generally not deductible. For employer-owned life insurance, Section 101(j) requires that the employee be notified and consent in writing before the policy is issued, and that annual reporting be filed, for the death benefit to keep its generally income-tax-free status. Key person disability benefits may be taxable depending on how premiums are treated.

Noble Insurance Strategies does not provide legal or tax advice. Agreements, trusts, and entity structures should be drafted and reviewed by your attorney, and tax treatment confirmed with your CPA.

Suitability & Limits

Coverage requires underwriting of the insured person and financial justification by the business.

Notice-and-consent must be completed before issue, not after.

Key person coverage does not by itself fund a buyout of ownership.