KEY PERSON LIFE INSURANCE PLANNING
Kelly Insurance Group places key person life insurance for businesses of all sizes — helping owners identify who qualifies as a key person, how to size the death benefit based on actual business impact, and how to structure the policy ownership and beneficiary to serve the specific business continuity objective.
SELECT THE KEY PERSON PROFILE TO SEE HOW COVERAGE SHOULD BE STRUCTURED.
The founder who drives revenue relationships, product direction, and investor confidence represents the highest key person concentration risk. Their death can trigger lender covenant violations, client attrition, and investor withdrawal simultaneously. Key person coverage sized to 3 to 5 years of revenue loss — or the estimated cost of a management transition — provides the capital to stabilize operations and demonstrate financial continuity.
- Coverage amount: 3 to 5 times annual revenue or income contribution
- Owner: business entity
- Beneficiary: business entity
- Use of proceeds: stabilization, replacement search, debt covenant compliance
A single salesperson responsible for 30% to 60% of a company's revenue represents a key person risk that most businesses underestimate until that person leaves — or dies. Key person coverage on a top revenue producer provides the capital to bridge the revenue gap while a replacement is hired and ramped, and to satisfy any client communication or retention costs during the transition.
- Coverage amount: revenue contribution times 2 to 3 years
- Owner: business entity
- Beneficiary: business entity
- Use of proceeds: revenue bridge, client retention, replacement hiring and ramp
A software architect, technical founder, or domain expert whose knowledge cannot be replicated quickly represents a key person risk that affects product delivery, client retention, and company valuation. Key person coverage on a technical expert funds the extended timeline to find, hire, and onboard a replacement — and provides capital to retain other technical staff during a period of uncertainty.
- Coverage amount: replacement cost plus 18 to 24 months of productivity gap
- Owner: business entity
- Beneficiary: business entity
- Use of proceeds: replacement search, retention bonuses, delivery continuity
In a multi-owner business, the death of a co-founder or operating partner creates both a key person gap and a buy-sell trigger simultaneously. Key person coverage on a co-founder may need to address both the operational loss and the ownership transition — or be structured alongside separate buy-sell coverage to address each purpose with the appropriate death benefit.
- Coverage amount: operational impact plus any buy-sell obligation
- Owner: business entity or cross-purchase structure
- Beneficiary: depends on structure
- Use of proceeds: operations and buy-sell funding (coordinate with buy-sell coverage)
WHAT KEY PERSON COVERAGE IS, HOW IT IS STRUCTURED, AND HOW THE AMOUNT IS DETERMINED.
KEY PERSON INSURANCE IS OWNED BY AND PAYABLE TO THE BUSINESS — NOT THE INDIVIDUAL
The company owns the policy, pays the premiums, and is the named beneficiary. The key person has no rights to the policy's cash value or death benefit. This structure serves the business — not the key person's family. The key person's personal life insurance program separately addresses income replacement and family financial protection.
THE COVERAGE AMOUNT REFLECTS THE BUSINESS IMPACT — NOT THE KEY PERSON'S SALARY
Key person coverage is not simply a salary multiple — it reflects the actual financial impact of the key person's death on the business. Revenue the key person generates or protects, the cost to recruit and train a replacement, the timeline of productivity loss during transition, and any lender covenant or investor confidence impact are all components of a properly sized key person coverage calculation.
THE DEATH BENEFIT IS RECEIVED INCOME-TAX-FREE — BUT PREMIUMS ARE NOT DEDUCTIBLE
A business that receives a key person death benefit receives it income-tax-free. This is a significant advantage at the moment the business most needs capital. However, premiums paid on key person coverage are generally not deductible as a business expense when the business is the beneficiary. The after-tax cost of premiums should be modeled against the after-tax cost of being uninsured at a key person's death.
EXPLORE MORE BUSINESS LIFE INSURANCE RESOURCES
FREQUENTLY ASKED QUESTIONS.
Who qualifies as a key person for life insurance purposes?
A key person is any individual whose death would create a significant, quantifiable financial impact on the business — revenue loss, client attrition, operational disruption, lender confidence issues, or an extended and costly replacement process. This commonly includes founders, top revenue producers, technical experts, and executives with critical external relationships. The test is financial impact — not seniority or job title.
How do you calculate the right amount of key person life insurance?
Common methodologies include: a multiple of the key person's compensation (typically 5 to 10 times); an estimate of the revenue they generate or protect over two to three years; the cost to recruit, hire, and ramp a replacement plus the productivity gap during that period; and the potential loss of a specific contract, client relationship, or investor commitment. There is no single formula — the right amount reflects the specific business impact.
Can a small business with only one or two employees benefit from key person insurance?
Often yes — small businesses frequently have the highest key person concentration risk. A two-person firm where one partner is responsible for all client relationships has 100% key person concentration. Key person insurance on that individual provides the surviving partner with the capital to manage the business through a transition rather than being forced into a distressed wind-down.
Is key person insurance the same as a buy-sell agreement?
No. Key person insurance compensates the business for the financial impact of a key person's death. A buy-sell agreement — typically funded with separate life insurance — governs the purchase of a deceased owner's business interest. Both are important for a business with multiple owners; they serve different purposes and typically involve separate policies.
What happens to the key person policy if the key person leaves the company before dying?
The company can surrender the policy for its cash value, transfer ownership to the departing key person as part of a separation agreement (which may be structured as an executive benefit), or allow the policy to lapse. The handling depends on the policy type, the accumulated cash value, and any employment agreement provisions regarding the policy.
Does the company need the key person's consent to purchase key person life insurance?
Federal law requires that employers obtain employee consent — and in some cases notice — before purchasing life insurance on employees above a minimum face amount. The specific consent and notice requirements are set out in IRC Section 101(j). For policies on owners and partners, different rules may apply depending on the business structure. Confirm the consent and notice requirements with legal counsel before applying.
READY TO GET STARTED?
PROTECT YOUR BUSINESS FROM THE FINANCIAL IMPACT OF LOSING YOUR MOST IMPORTANT PERSON.
Kelly Insurance Group places key person life insurance for businesses of all sizes — identifying the right coverage amount, structuring the policy ownership and beneficiary correctly, and coordinating with the business's buy-sell and succession planning to ensure complete business life insurance coverage.
The availability of coverage and eligibility for coverage can depend on numerous factors. We cannot guarantee that all customers, individuals, and businesses looking for coverage will be successful in these efforts when contacting our team. All policy coverages and terms need to be fully reviewed by the respective consumer to ensure the coverage asked for is what is specifically being quoted or provided by any insurance policy. Insurance Policies, Coverage Changes, and their terms and conditions are not bound or altered until written confirmation is provided by one of our licensed team members or underwriters. This page does not offer legal advice, legal opinions, or policy interpretations. Rather, this page is meant as a resource to help provide customers and insurance consumers with additional considerations that may help in their insurance buying or pursuit of insurance information. Kelly Insurance Group does not employ or direct attorneys.
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Disclaimer: Coverage availability and eligibility may depend on many factors, including underwriting review, carrier guidelines, policy terms, state requirements, business operations, risk characteristics, and other information provided during the application or quoting process. Kelly Insurance Group cannot guarantee that every individual, customer, organization, or business seeking coverage will qualify for, receive, or successfully place insurance coverage. All policy coverages, exclusions, conditions, limits, endorsements, and terms should be carefully reviewed by the consumer, insured, or applicant to confirm that the coverage requested is the coverage being quoted, offered, or provided. Insurance coverage, policy changes, endorsements, cancellations, and other policy terms are not bound, changed, confirmed, or altered unless and until written confirmation is provided by a licensed Kelly Insurance Group team member, the applicable insurance carrier, or an authorized underwriter. This page is provided for general informational purposes only and does not provide legal advice, legal opinions, insurance coverage opinions, or policy interpretations. Information on this page should not be relied upon as a substitute for reviewing the actual policy language or consulting appropriate professional advisors. Kelly Insurance Group does not employ, supervise, or direct attorneys.