Key Person Insurance for Small Businesses
Key person insurance is life or disability coverage that a business owns on an employee whose loss would hurt revenue, operations or the company's ability to borrow. The business pays the premiums and is the beneficiary, and the proceeds give it time and money to recover: replacing lost income, recruiting and training a successor, or reassuring lenders and customers. It is one of the most common gaps we see in small businesses around Atlanta.
Who counts as a key person?
Anyone the business would struggle to replace quickly: a founder or owner, a top salesperson who holds the client relationships, the engineer or chef the product depends on, or the manager who runs operations day to day. A simple test is to ask what would happen to revenue in the twelve months after that person was suddenly gone.
How much coverage does a business need?
There is no single formula. Common approaches are a multiple of the person's compensation (often five to ten times), an estimate of the profit tied to that person, or the cost to recruit and train a replacement plus the revenue lost during the transition. Lenders sometimes require a specific amount as a condition of a loan.
Is key person insurance the same as a buy-sell agreement?
No, but they often sit side by side. A buy-sell agreement funds the purchase of a departing owner's share; key person coverage funds the business's recovery from losing someone important, owner or not. Many businesses need both.
Term or permanent coverage?
Term insurance covers a set period at a lower cost and fits a need that will end, such as a loan term or the years before a planned retirement. Permanent insurance builds cash value the business can carry on its balance sheet and can later be repurposed, for example as part of a retirement or retention benefit for the key person. The choice depends on budget and how long the need will last.
How is it taxed?
Premiums paid by the business are generally not deductible, and death benefits are generally received income tax-free when the notice and consent requirements for employer-owned life insurance are met before the policy is issued. The rules have specifics, so we coordinate with your CPA. We do not provide tax advice.
What does the process look like?
Identify the people, estimate the amounts, choose the type of coverage, complete underwriting, and document the employee's written consent. We handle the application and underwriting and review the coverage with you each year as the business and the people change.
Talk with us
Call 770-250-7588 or use the Contact Us page. If you have a loan agreement or a buy-sell agreement, bring those too.
This material is for general information only and is not legal or tax advice. Insurance products are subject to underwriting and have costs and limitations. Guarantees are based on the claims-paying ability of the issuing insurance company.