Glossary

Key person insurance

A policy a business buys on an owner or essential employee, naming itself beneficiary, to cover losses and replacement costs if that person dies.

Also called: key man insurance, key employee insurance, key person life insurance

Key person insurance is life insurance a company owns on someone whose death would seriously hurt the business: a founder, a top salesperson, an engineer with critical knowledge. The business pays the premiums, owns the policy and is the beneficiary. The money can replace lost profits, pay to recruit and train a successor, reassure lenders, or keep the company running while the owners decide what to do next.

Coverage amounts are usually based on the person's contribution, such as a multiple of compensation or an estimate of lost profits. Say, hypothetically, a firm estimates that losing its sales director would cut profits by $300,000 a year for two years while a replacement ramps up, so it buys a $600,000 term policy on that person. Premiums are generally not tax-deductible.

The payout's tax treatment depends on following the rules. For employer-owned policies issued after August 17, 2006, IRC Section 101(j) generally requires the employer to notify the employee in writing and get consent before the policy is issued. Skipping the notice and consent can make most of the death benefit taxable. Key person coverage is separate from a buy-sell agreement, though the two are often planned together. See key person life insurance.

Last reviewed October 4, 2026

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Related terms

Corporate-owned life insurance (COLI) Life insurance a business buys on its employees or executives, owns and is the beneficiary of, often to fund benefits or offset the loss of key people. Section 101(j) notice and consent Federal tax rules requiring employers to notify employees and get written consent before insuring them, or lose most of the tax-free death benefit. Buy-sell agreement A contract among business owners that sets who buys a departing or deceased owner's share and at what price, often funded with life insurance. Policy owner The person or entity that controls a life insurance contract: it names beneficiaries, pays premiums and can borrow against, assign or surrender it. Executive bonus plan An employer benefit in which a company pays a bonus to cover premiums on a life insurance policy the executive owns, deducting it as compensation.

Related guides

Insurable interest: who can buy life insurance on whom Insurable interest is the family or financial tie that lets you insure someone else's life. Who qualifies, when it must exist, and the consent rule. Key person life insurance How key person life insurance works: who qualifies, how to size it, who owns it, and the tax rules (IRC 101(j), Form 8925) that apply to company-owned policies. Life insurance for small business owners The four jobs life insurance does for a small business owner: protect family income, fund a buy-sell, cover a key person and back loans. How each works.

Related insurers

Federated Life The life insurance arm of Federated Insurance, an Owatonna, Minnesota, mutual that insures businesses in select industries and sells life cover to their owners. Principal Financial Group Des Moines insurer that quit selling life insurance to retail consumers in 2021; it now sells to business owners and executives and services older policies.