Key Man Insurance: What Every Business Owner Needs to Know
Key man insurance (also called key person insurance) is a life or disability insurance policy that a business owns on a critical employee or owner. If that person dies or becomes disabled, the policy pays a benefit to the business to help it survive the financial impact of the loss.
Who Needs Key Man Insurance
Any business where the loss of one person would cause significant financial harm. This typically includes founders, CEOs, top salespeople, and technical specialists whose knowledge or relationships are difficult to replace. If your business would struggle to survive the sudden loss of a specific individual, that person is a key man risk.
How It Works
The business applies for and owns the policy. The business pays the premiums and is the beneficiary. If the key person dies or becomes disabled (depending on the policy type), the business receives the death or disability benefit. The proceeds can be used to recruit and train a replacement, pay off debt, buy out a deceased partner's estate, or simply keep the business operating during the transition.
Key Man vs. Buy-Sell Insurance
Key man insurance protects the business from the loss of a key employee. Buy-sell insurance funds the purchase of a deceased or disabled partner's ownership interest. Many businesses need both. A&C evaluates your specific ownership structure and recommends the right combination.
How Much Coverage Do You Need
Coverage amounts are typically based on the key person's contribution to revenue, the cost to recruit and train a replacement, and any debt or obligations that would accelerate on their death. A&C conducts a business valuation analysis to recommend appropriate coverage levels.
Tax Considerations
Key man insurance premiums are generally not tax-deductible when the business is the beneficiary. Death benefits are generally received tax-free. The tax treatment of buy-sell arrangements depends on the structure (cross-purchase vs. entity purchase). Consult your tax advisor for guidance specific to your situation.