Key person coverage

Businesses carry insurance coverage to protect their business from the loss of property and equipment, but what about their most valuable asset — their key employees?

A key employee may be the owner, a partner, a top executive or an important member of the organization with unique talents, experience or skills that are crucial to the prosperity of the business. Key person life insurance protects the business from the financial impact of the loss of an essential employee.

How key person insurance works

Key person insurance

  1. Your business purchases a life insurance policy on key employee(s) after giving notice to and receiving written consent from the key executive.
  2. The business pays the nondeductible premium and is the beneficiary of the policy. If your key employee dies while the policy is in-force, your company receives the death benefit, generally income tax-free.*
Considerations for the business
  • Key person insurance can provide a source of income to replace profits or capital lost because of a key employee’s death.
  • Death benefit proceeds can be used to fund the recruitment and training efforts to replace key employees.†
  • Key person insurance gives you access to cash to help settle any loans due, or to use for other expenses or bills as the company transitions.†
Considerations for the employee
  • The employee’s value as a key contributor to the business is confirmed.
  • If the employee holds an ownership interest in the business, they should be aware that the death benefit proceeds may cause an increase in the value of their business interest. They should consult a professional tax advisor.
  • Life insurance purchased and owned by a business on the employee may reduce their overall life insurance capacity.


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Read our case study:  Protecting your business investment (PDF)

*For federal income tax purposes, life insurance death benefits generally pay income tax-free to beneficiaries pursuant to IRC Sec. 101(a)(1). In certain situations, however, life insurance death benefits may be partially or wholly taxable. Situations include, but are not limited to: the transfer of a life insurance policy for valuable consideration unless the transfer qualifies for an exception under IRC Sec. 101(a)(2) (the transfer-for-value rule), arrangements that lack an insurable interest based on state law, and an employer-owned policy unless the policy qualifies for an exception under IRC Sec. 101(j).

†Annual increase in policy cash values and death benefit proceeds may have corporate alternative minimum tax implications.