If the loss of an owner or key employee would create a financial challenge, key-person insurance is vital
Think of key-person insurance as "corporate income stability." Just as personal life insurance protects your family if you pass away, this coverage acts as a financial parachute for your company, softening the blow if an indispensable owner, top executive, or key employee unexpectedly dies or becomes disabled.
Why is Key-Person Insurance vital?
- Business Survival: It provides the cash flow needed to keep the doors open, pay existing salaries, and maintain operations while you recruit a replacement.
- Lender Confidence: Banks often require it when issuing business loans so they know the debt can be repaid if the driving force behind the company is gone.
- Investor Reassurance: It signals to stakeholders and partners that the business has a contingency plan in place.
How it works
- Ownership: The business owns the policy, pays the premiums, and is named the beneficiary (not the employee's family).
- Payout: If the key person passes, the company receives the tax-free death benefit to cover losses or buy out a deceased partner's stake.
- Flexibility: You can use term policies for temporary needs or permanent policies to build cash value over time.
How to determine coverage amount
If you’re thinking about purchasing key person insurance, you’ll need to calculate the right amount of coverage to obtain. Here are three ways to determine an appropriate coverage limit:
- Key person's salary: Take the worker’s annual salary and multiply it by 10. For example, if the key person’s salary is $250,000 per year, a $2,500,000 coverage limit might be sufficient to keep the business afloat.
- Cost of replacing them: You can calculate a coverage limit based on the cost of replacing the individual. For this method, add the estimated cost of hiring and training a replacement. Then, add the revenue loss you would expect from losing the key person.
- Potential loss of revenue: Think about how much revenue the business could lose if the key person passed away and multiply that figure by the number of years it would take to replace them with a new person. For instance, if the key person brings in $1 million in sales per year, and you think it would take five years to replace them, you could choose a $5 million coverage limit.
Tax implications
The IRS will not allow employer-owned life insurance policy premiums to be written off. However, if the employee or key-person passes away, the death benefit is typically tax-free.
Many other business insurance premiums are tax deductible because the insurance benefit may often benefit an injured third-party or go towards replacing damaged property. Whereas key-person insurance pays a lump some to the owner of the policy. In this situation, it would be far more profitable for the business to get the lump sum tax free compared to tax savings by writing off annual premium payments.
© 2026 Vetinsure. All rights reserved.
© Copyright 2026 Vetinsure. All rights reserved.