Key Person Protection.

Most companies have a person whose skills are vital to the success of the business. A key person may be an owner, a partner, or an employee the company could not lose without serious consequences. The employer purchases a policy on that person and is the owner, the premium payor, and the beneficiary of it.

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Worth Knowing

Two Things That Decide Whether It Works.

Key person coverage is simple to describe and easy to get wrong in the paperwork. These two points come from the carrier documents themselves.

The company is the beneficiary, which is exactly why the rules apply

Proceeds from employer-owned life insurance are generally received free of federal income tax. If the policy does not satisfy the notice and consent provisions under Internal Revenue Code section 101(j), the amount above the premium paid is included in the employer's income instead. The consent is a document, signed before the policy exists.

Source: North American Company for Life and Health Insurance, Buy-sell with life insurance, 215NM-3a

Protection is the foundation layer, not the whole building

One employer-owned permanent policy can be built up in stages: key person protection at the base, then a share of the death benefit directed to the employee's beneficiary through an endorsement split dollar arrangement, then a retention bonus paid after a set period of service, then funding to help that same employee buy the business one day. One policy, four jobs, added as the business is ready for them.

Source: North American Company for Life and Health Insurance, Executive Retention+, 1896NM-6

The Structure

What This Actually Does.

What it does

Buys the company time

The death benefit is paid to the business, not to a family. It covers the cost of finding and hiring a replacement, steadies a credit line that was extended partly on that person's reputation, and funds the months where revenue dips while the company reorganizes.

Who qualifies

The person, not the title

The test is not seniority. It is what happens to revenue, credit, and staff confidence if that person is gone on Monday. Sometimes it is the founder. Often it is the one salesperson who holds half the accounts, or the operations lead nobody has cross-trained.

How it is sized

Tied to a number you can defend

Common approaches value a key person by a multiple of compensation, by the contribution to profit, or by the actual cost to replace the role. Whichever method is used, it should be written down, because an arbitrary face amount is difficult to justify later.

Every business will face this eventually, through a death, a disability, or a key employee simply deciding to leave. The only variable is whether the company has prepared for it.

Keep Going

The Rest of the Suite.

Business Transition Buy-Sell Business Transition Succession & Continuation Business Transition Business Valuation Business Transition Estate Equalization Business Preservation Executive Benefits

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Start Where You Are.

Whether your agreements are drafted, outdated, or still an intention, this conversation is private, unhurried, and specific to your company.

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Important: This page is general education. It is not legal, tax, accounting, or individualized financial advice. Buy-sell agreements, split dollar arrangements, deferred compensation plans, and trusts should be drafted by a qualified attorney, with tax treatment confirmed by a qualified tax professional. Life insurance policies contain costs, charges, limitations, exclusions, and conditions; coverage depends on underwriting and on the terms of the policy issued. Guarantees are backed by the claims-paying ability of the issuing insurance company. Policy loans and withdrawals reduce cash value and death benefit, are subject to interest charges, and are generally not subject to income tax provided the contract is not a Modified Endowment Contract as defined by Section 7702A of the Internal Revenue Code. Distributions from a Modified Endowment Contract are taxable to the extent of gain and may carry an additional tax before age 59 and a half. Carrier material referenced on this page is cited to its published form number.