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Key Person Life & Disability Insurance
Protect your business if an owner, top producer, or critical employee dies or becomes disabled. The business owns the policy and receives the benefit.
Coverage built around the people your business runs on.
Protect What You Built
A free key person coverage review for your business
What is key person insurance?
Key person insurance is coverage a business buys on someone whose loss would hurt revenue, operations, or the ability to borrow. The business owns the policy, pays the premium, and receives the benefit.
The money can replace lost profits, cover the cost of recruiting and training a replacement, pay down business debt, or reassure lenders and clients. Key person disability insurance does the same thing if that person can’t work because of illness or injury, which is statistically more likely than death during a working career.
Types of key person and business disability coverage
Key person life insurance
Pays a lump sum to the business if the insured person dies. Term coverage is common for a set period, such as the length of a loan. Permanent coverage builds cash value the business can use later.
Key person disability insurance
Pays the business a monthly or lump sum benefit if the key person becomes disabled, after a waiting period. It helps the business keep running while that person recovers or is replaced.
Business overhead expense insurance
Reimburses ongoing business expenses, such as rent, staff salaries, and utilities, if the owner is disabled. This is especially important for medical and dental practices where the owner produces most of the revenue.
Disability buy-out insurance
Funds the purchase of a disabled owner’s share of the business under a buy-sell agreement.
Is key person insurance tax deductible?
| Coverage | Premiums | Benefits |
|---|---|---|
| Key person life | Generally not deductible | Generally income tax free, if IRS notice and consent rules are met |
| Key person disability | Generally not deductible | Generally tax free to the business |
| Business overhead expense | Generally deductible | Taxable, offset by the expenses they pay |
| Disability buy-out | Generally not deductible | Generally tax free |
Important: for employer-owned life insurance, the employee must be notified in writing and consent before the policy is issued (IRS Section 101(j)), and the business reports the policy each year on Form 8925. Missing this step can make the death benefit taxable.
How We Build Your Strategy
From first call to final paperwork, we handle the design, the underwriting, and the coordination.
1
Review Your Business
We look at your income, age, staff census, and current plan to see what’s possible.
Design the Coverage
We match the right policy type and amount to your business, your plans, and your budget.
See the Numbers First
You get a clear illustration of the cost, the coverage, and the tax treatment before you commit.
We Run It for You
We coordinate underwriting, ownership, beneficiaries, and reviews with your CPA and attorney.
Who needs key person insurance?
- Medical, dental, and professional practices where the owner generates most of the revenue
- Businesses with a top producer or rainmaker whose clients follow them
- Businesses with bank loans or SBA financing, where lenders often require coverage
- Partnerships and multi-owner businesses that need to fund a buyout
- Companies planning a sale or succession that depend on one leader in the meantime
How much key person coverage do you need?
There’s no single formula. Common approaches include:
- A multiple of the person’s compensation
- Their contribution to profits over the time it would take to recover
- The cost to recruit, hire, and train a replacement
- Outstanding business debt that a lender would call
Insurers limit coverage based on financial underwriting, and disability benefits are capped based on the person’s compensation. We’ll help you land on a number that’s defensible and affordable, and coordinate it with your executive benefits and retirement plans.
Life and disability insurance require medical and financial underwriting. Policy guarantees depend on the claims-paying ability of the issuing insurance company. Illustrations are hypothetical and not guaranteed. Tax treatment depends on your facts, so review any strategy with your tax professional.
Setting up key person insurance correctly after Connelly
In June 2024, the U.S. Supreme Court ruled in Connelly v. United States that life insurance proceeds paid to a company count toward the company’s value for estate tax purposes. For coverage on a key employee who isn’t an owner, that rarely matters. But when the insured person is an owner, a company-owned policy can raise the value of that owner’s shares, and their taxable estate, by the amount of the death benefit.
That makes how the policy is owned just as important as how much coverage you buy. Common structures:
| Structure | How it works | When it fits |
|---|---|---|
| Company-owned policy | The business owns the policy, pays the premium, and receives the benefit | Key employees who aren’t owners, or owners whose estates are well below the federal exemption ($15 million per person in 2026) |
| Separate insurance LLC or trust | A separate entity owns the policies and receives the benefit, so the proceeds don’t land on the company’s books | Owners concerned about estate tax, and businesses with several owners |
| Cross-purchase with a buy-sell agreement | Owners own policies on each other, so the same coverage can fund a buyout | Partners whose coverage also needs to fund a buyout. See buy-sell funding |
| Split-dollar or executive bonus | The business helps pay premiums on a policy owned by the owner or their trust | Owners who want personal coverage the business helps pay for. See executive benefits |
We’ll tell you which structure fits. We review your entity, ownership, buy-sell agreement, and estate picture, recommend how the coverage should be owned and paid for, and coordinate the details with your attorney and CPA. If your business already owns policies on its owners, we’ll review those too.
Why business owners work with Life, Inc.
- Everything under one roof. Plan design and administration, investment advisory, and insurance strategies, all from one team. No juggling three different firms.
- A credentialed, in-house team. Our plan specialists hold industry designations including QKA, QPA, and AIF, and handle your plan year round.
- Insurance designed with your retirement plan. Coverage is built to work alongside your 401(k), cash balance plan, and executive benefits, not sold on its own.
- Custom, not cookie-cutter. Every plan is designed around the owners’ tax goals first, then built to pass IRS testing.
- Nationwide. We design and administer plans for businesses across the country.
Learn more: Buy-Sell Funding | Executive Benefits | Tax Strategies for Business Owners | The Retirement Plan Stack | About Us
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Our Most
Asked Questions
What is key person insurance?
It is life or disability insurance a business buys on an owner or critical employee. The business owns the policy, pays the premiums, and receives the benefit if that person dies or becomes disabled.
Is key person insurance tax deductible?
Generally no. Key person life and disability premiums are not deductible when the business is the beneficiary. In exchange, the benefits are generally received tax free. Business overhead expense premiums are the exception and are generally deductible.
Is key person disability insurance worth it?
For many small businesses, yes. A working-age person is more likely to suffer a long-term disability than to die before retirement, and a disabled owner can still draw on business resources while producing nothing.
What is the difference between key person disability and overhead expense insurance?
Key person disability pays the business to offset the lost value of the person. Business overhead expense insurance reimburses specific fixed costs, like rent and payroll, while the owner is disabled.
What is the 101(j) notice and consent requirement?
Before an employer-owned life insurance policy is issued, the employee must be told in writing that the business intends to insure them and must consent. Without it, much of the death benefit can become taxable to the business.
What happens to the policy if the key person leaves?
The business can keep the policy, surrender it for any cash value, or transfer it, often to the departing employee. Transfers can have tax consequences, so plan them carefully.
Does the Connelly decision affect key person insurance?
It can. Under Connelly v. United States (2024), life insurance proceeds a company receives count toward its value for estate tax. If the policy insures an owner, the death benefit can increase that owner’s taxable estate. Structures like a separate insurance LLC, a trust, or a cross-purchase arrangement can avoid that, and we’ll recommend the right one for your situation.
How quickly can key person coverage be put in place?
It depends on underwriting. Term life coverage can often be issued within a few weeks once medical and financial information is in. Disability coverage can take longer because of income documentation.
Some Of Our Trusted Partners:
Life, Inc. Retirement Services does not offer tax advice. Please always consult your tax professional about your eligibility for tax credits.
Life, Inc. Retirement Services is a Registered Investment Advisory Firm of the state of Ohio and licensed in Florida and Maryland. All emails and communication are meant to be informative and educational and should not be considered a sale of security until proper notification and disclosures are given.