1. What is Key Person Insurance?

It’s a life or disability insurance policy a business takes out on an essential employee, where the company pays the premiums and receives the payout if that person dies or becomes disabled.

2. Who qualifies as a key person?
Founders, executives, partners, or anyone whose loss would significantly impact revenue, leadership, or operations.

3. Why is Key Person Insurance important?
It protects your business from financial losses and disruption following the death or incapacity of an irreplaceable individual.

4. What types of Key Person Insurance exist?
The two main types are Key Person Life Insurance and Key Person Disability Insurance. Many companies choose both for full protection.

5. How much coverage should my business buy?
Most experts recommend coverage equal to two to five years of the individual’s financial contribution to the company or replacement cost.

6. Is the payout from Key Person Insurance taxable?
No, payouts are generally tax-free if employee consent was obtained before policy issuance (per IRS Section 101(j)).

7. Are premiums tax-deductible?
Usually not. Premiums are considered non-deductible because the benefit is for the company, not an employee perk.

8. Who owns the Key Person policy?
The business itself owns the policy, pays premiums, and is the beneficiary of the proceeds.

9. What happens if the insured leaves the company?
You can transfer ownership to the employee, cancel the policy, or assign it to another key person.

10. Does Key Person Insurance cover retirement or resignation?
No, it only covers death or disability, not voluntary departures.

11. Can small businesses afford Key Person Insurance?
Yes. Term policies are very affordable, often starting around $25–$50 per month for $500,000 of coverage.

12. Can multiple people be insured?
Absolutely. Businesses can take out policies on several key individuals, such as founders, CFOs, and technical directors.

13. What’s the difference between Key Person and Buy-Sell Insurance?
Key Person Insurance benefits the company, while Buy-Sell Insurance funds the transfer of ownership between partners.

14. Does Key Person Insurance help secure loans or funding?
Yes. Lenders and investors often require it to guarantee continuity and repayment in case of leadership loss.

15. How are payouts typically used?
To cover operational costs, replace lost revenue, hire replacements, or buy out ownership shares.

16. Can a payout be delayed?
Yes, if documents are incomplete or investigations are pending. Filing quickly and accurately avoids delays.

17. What happens if my company doesn’t have consent documentation?
Without written employee consent, the payout may be taxed as business income.

18. Is disability coverage worth it?
Yes. Disability is statistically more likely than death and can disrupt operations for months or years.

19. How often should policies be reviewed?
At least annually — or whenever leadership, revenues, or ownership structures change.

20. Can Key Person Insurance protect a startup?
Definitely. Startups depend heavily on founders or specialized experts, making this coverage critical to investor confidence and operational survival.