Question 1

Do I need key man insurance for a small business?

Accepted Answer

If losing one specific person would sharply cut your revenue, put your financing at risk, or make it hard to keep the doors open, then key man insurance usually makes sense. A business that would run fine without any single individual probably does not need it. The test is dependence, not headcount.

Question 2

Who is considered a key person in a business?

Accepted Answer

A key person is anyone whose death would seriously hurt the company financially. That is often the owner or founder, but it can also be a top salesperson who drives a large share of revenue, a partner, a lead engineer, or anyone with relationships or knowledge the business would struggle to replace quickly.

Question 3

How much key man insurance do I need?

Accepted Answer

There is no single formula. Common approaches size the benefit to a multiple of the person's salary or the profit they drive, the cost to recruit and train a replacement, and any business debt they personally guarantee. Many small businesses land somewhere between five and ten times the person's compensation, then adjust for debt and revenue impact.

Question 4

Is key man insurance tax deductible?

Accepted Answer

Generally no. The IRS does not let a business deduct premiums on a policy where the business is the beneficiary. In exchange, the death benefit is usually received income-tax-free if the employer-owned life insurance notice and consent rules are met before the policy is issued. Ask a tax professional about your situation.

Question 5

Who owns and who receives a key man insurance policy?

Accepted Answer

With key man insurance the business applies for, owns, pays for, and is the beneficiary of the policy. The insured is the key employee or owner. When that person dies, the payout goes to the company, not to the family, which is what separates it from a personal life insurance policy.

Question 6

Is key man insurance the same as a buy-sell agreement?

Accepted Answer

No. Key man insurance replaces lost value and keeps the business running after a key person dies. Buy-sell life insurance funds the purchase of a deceased owner's shares so the remaining owners keep control. Many businesses with partners need both, because they solve different problems.

The Family Bank

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