The short answer
Key person insurance is a policy the business owns on someone whose death would hurt revenue or operations; the payout helps the company cover lost income, debts, or hiring a replacement. Buy-sell insurance funds an agreement that lets surviving owners buy a deceased owner's share, so the business continues and the owner's family is paid fairly.
Key person insurance
- The business is the owner, payer, and beneficiary.
- Coverage is often sized to the revenue or profit at risk, loans the person guarantees, and the cost of finding a replacement.
- Common for founders, top salespeople, and anyone whose relationships or skills drive the business.
Buy-sell agreements funded with life insurance
Your attorney drafts the agreement and your CPA advises on tax treatment; insurance funds it so cash is available when it's needed.
| Structure | Who owns the policies | Best for |
|---|---|---|
| Cross-purchase | Each owner owns a policy on the other owners | Businesses with a small number of owners |
| Entity redemption | The business owns a policy on each owner | Businesses with several owners |
Other ways owners use life insurance
- Covering business loans that you personally guarantee.
- Providing your family with liquidity while the business is sold or wound down.
- Executive benefit and retention plans for key employees.
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Frequently asked questions
Are key person insurance premiums tax deductible?
Generally no when the business is the beneficiary, and the death benefit is generally received income-tax-free if notice-and-consent rules are met. Confirm with your CPA.
How much key person insurance does a business need?
A common approach is to estimate the profit that would be lost while replacing the person, plus outstanding debts they guarantee and recruiting costs.
This guide is general education, not individual insurance, investment, tax, or legal advice. Product features, availability, and underwriting vary by insurer and state. See our disclosures.