Key Person Insurance
Life or disability coverage purchased by a business on a critical employee whose loss would cause significant financial harm.
What is Key Person Insurance?
Key person insurance, also called key man insurance or key employee insurance, is a life or disability income policy purchased by a business on an employee whose knowledge, skills, relationships, or leadership are so critical that their death or disability would cause significant financial hardship to the company. The business pays the premiums, owns the policy, and is the beneficiary. Proceeds are used to cover costs such as recruiting and training a replacement, covering lost revenue or profits during the transition period, or repaying business loans the key person may have personally guaranteed. Death benefits paid to a corporation are generally received income-tax-free.
Example
A technology startup carries $3 million in key person life insurance on its CTO, whose proprietary algorithms drive the company's product. The annual premium of $12,000 is paid by the company. When the CTO dies unexpectedly, the $3 million proceeds allow the company to hire two experienced engineers, cover 18 months of project delays, and service its debt — preserving business continuity and investor confidence.
Source: IRS — Business Insurance