Key Person Insurance

Key person insurance is a life insurance policy owned and paid for by a business on the life of someone whose loss would materially damage it — a founder, a rainmaker salesperson, the engineer who holds the product in their head. The business is owner, payer, and Beneficiary; the Death Benefit lands on the company's balance sheet when the key person dies.

The money buys survival time: covering revenue that walks out the door, recruiting and training a replacement (often 1–2 years of salary or more for senior roles), reassuring lenders whose loans may have covenants tied to management continuity, and steadying customers and employees through the transition. Banks and investors frequently require key person coverage before extending serious credit.

Sizing is more art than formula, but common anchors are 5–10× the key person's compensation, or a multiple of the profit attributable to them. Term insurance covers the need cheaply; permanent coverage adds Cash Value the business owns — an asset that can double as an informal executive benefit or emergency reserve, and that plays naturally with corporate Infinite Banking strategies where the business builds its own financing capacity.

Tax mechanics deserve attention: premiums are not deductible, and employer-owned policies must satisfy IRC §101(j) — written notice to and consent from the insured before issue — or the death benefit can become taxable income. It's a form signed at application; skipping it is an expensive clerical error.

Key person coverage protects the business from losing a person. The companion question — what happens to the ownership when an owner dies — is answered by a Buy-Sell Agreement, and the two are usually designed together.