Key Person and Business Life Insurance

Key person coverage

The business owns the policy, pays the premium, and is the beneficiary. If the insured person dies, the company receives the proceeds and uses them to absorb the disruption: covering lost revenue, recruiting and training a replacement, reassuring lenders, and keeping payroll running while the business stabilizes.

The insured is usually an owner, but it does not have to be. It is whoever the business genuinely could not lose quietly: the person who holds the client relationships, the one with the technical knowledge nobody else has, the producer responsible for a disproportionate share of revenue.

Funding a buy-sell agreement

If you have partners, you should have a buy-sell agreement, and if you have a buy-sell agreement it should be funded. Otherwise the surviving owners have a contractual obligation to purchase a deceased partner’s interest and no cash with which to do it.

• Cross-purchase. Each owner insures the others and buys their share directly.
• Entity purchase. The business owns policies on each owner and redeems the interest itself.

Which structure is better depends on the number of owners and on tax considerations that your CPA and attorney should weigh in on. We handle the insurance side and coordinate with them rather than working around them.

Loan and lender requirements

Many SBA and commercial loans require life insurance on the principals as a condition of financing, with the lender named as collateral assignee. If you are financing an acquisition or an expansion, this is worth arranging before closing rather than under deadline pressure at the last minute.

Setting the amount

For key person coverage, the honest measure is what the loss would cost: the revenue attributable to that person, the cost of recruiting and onboarding a replacement, and the time before the replacement is fully productive. For buy-sell funding, the amount follows the business valuation, which is worth revisiting periodically rather than leaving at whatever number was written into the agreement years ago.