Key person life insurance (also called key man or key employee insurance) is a policy purchased by a business on the life of an individual whose skills, knowledge, or leadership are critical to the company's financial success. The business is both the owner and beneficiary of the policy. If the key person dies, the death benefit provides the business with funds to cover the financial impact of losing that individual — including lost revenue, recruitment costs, and operational disruption.
The coverage amount for key person insurance is typically based on the individual's contribution to the business, which may be calculated using a multiple of their compensation, their share of business revenue, or the estimated cost of finding and training a replacement. Coverage amounts commonly range from five to ten times the key person's annual compensation, though the appropriate amount depends on the specific business situation.
Key person insurance can be structured as either term or permanent coverage. Term coverage is often appropriate when the key person risk is tied to a specific time period, such as a product development cycle or a loan repayment period. Permanent coverage may be appropriate when the key person's value to the business is ongoing or when the policy's cash value can serve as a business asset. Premiums paid by the business for key person insurance are generally not tax-deductible, but the death benefit is generally received income tax-free by the business.
Tennessee businesses of all sizes use key person insurance to protect against the loss of founders, top salespeople, lead engineers, or other critical personnel. A licensed agent in our network can help Tennessee business owners evaluate their key person risk and identify appropriate coverage levels.