For a US business, a useful key person insurance comparison starts with a question: what financial disruption would the business need to manage if a particular person died? Identify that purpose before comparing premiums or policy illustrations. The owner, beneficiary, duration and insured event must fit the intended business need.
Define whose financial loss the policy addresses
Guardian describes key person life insurance as company-owned coverage that pays the business after the insured person’s death. The business generally owns the policy, pays the premiums and receives the benefit, with the insured person’s written consent.[1]
Write down the proposed insured person, policy owner, premium payer and beneficiary. Then describe the intended use of proceeds. Do not assume a policy intended to support the business also supplies money directly to the person’s family or automatically implements a shareholder buy-sell agreement. Have the adviser check each objective and the supporting documents.
For example, a fictional manufacturer might depend on a technical director for customer approvals and specialised production knowledge. Its planning worksheet could identify temporary management, recruitment and a transition period. This is an illustration of how to describe exposure, not evidence of a typical loss or a recommended insurance amount.
Build a needs estimate without double-counting
Prepare the following business information for discussion with the licensed professional:
- Critical responsibilities: Which contracts, decisions or processes depend on this person?
- Continuity plan: Who would take over immediately, and which activities would remain uncovered?
- Transition costs: What evidence supports estimated recruitment, interim support and training costs?
- Financial disruption: Which assumptions drive the projected effect on operations, and for how long?
- Other resources: What existing arrangements or funds are already intended for the same purpose?
Label estimates and uncertainties rather than turning a salary multiple into a universal rule. Keep ownership-transfer funding, loan obligations and operating continuity visible as separate objectives, so the same anticipated proceeds are not casually allocated to each in full.
Compare term and permanent proposals on the same need
Guardian’s guide distinguishes term protection for a specified period from permanent insurance designed for longer duration and potentially including cash value.[1] That distinction is a starting point for discussion, not a recommendation that every owner needs permanent coverage.
- Duration — Term proposal: Show the stated term and what happens at its end; Permanent proposal: Show the conditions needed to keep protection in force over the intended horizon
- Funding — Term proposal: Identify guaranteed premiums and any later changes; Permanent proposal: Separate required funding, guarantees and assumptions in the illustration
- Change of plans — Term proposal: Explain available continuation or conversion provisions in the actual contract; Permanent proposal: Explain surrender terms and the consequences of changing payments or accessing value
- Decision evidence — Term proposal: Match the protection period to the business exposure; Permanent proposal: Explain why the additional structure serves a documented business objective
Ask for comparable death-benefit amounts and assumptions before reading the price difference. Keep guaranteed values separate from projected values. An illustration is not a promise that every projection will occur.
Ask separately about disability
A life insurance proposal should not be treated as proof of disability protection. Guardian expressly ties disability benefits in this context to additional policy provisions.[1] If inability to work is a concern, ask the adviser to identify the actual coverage, qualifying definition, waiting period, benefit duration, exclusions and recipient of payments. Compare that written response with the business’s continuity plan.
Complete consent and tax review before issuance
IRS Notice 2009-48 explains employer-owned life insurance rules under section 101(j).[2] For the relevant exceptions, the notice and consent requirements apply before policy issuance: they include written notice of the intention to insure and maximum face amount, written consent addressing continuation after employment, and notice that the policyholder will be a beneficiary.[2]
Have qualified advisers determine how those rules apply to the proposed arrangement before the insurer issues it. Do not assume that an ordinary application signature, or a document collected later, necessarily satisfies the requirements. Tax treatment depends on the arrangement and the applicable rules, including section 101(j).[2]
The IRS also provides Form 8925 for reporting employer-owned life insurance contracts.[3] Assign responsibility for determining filing obligations and keeping the underlying records. Filing a form does not by itself establish favourable tax treatment.
Request a complete proposal and a review plan
Ask each provider for the proposed ownership and beneficiary arrangement, actual policy form, insured events, underwriting requirements, exclusions, guarantees and total premium schedule. Identify who will track payments, retain consent records and review the policy when the person’s role, ownership or business needs change.
The decision should connect a documented business exposure to understandable contract terms. A low initial premium or an attractive projection is insufficient when the proposal leaves the intended recipient, duration or insured event unclear.
Frequently Asked Questions
- Does key person life insurance automatically cover inability to work?
- No. Check the actual contract and any additional disability provision. Guardian's guide makes disability protection conditional on additional policy terms.[1]
- Is a business-owned death benefit always tax-free?
- No blanket conclusion is appropriate. Employer-owned life insurance can involve section 101(j), including advance notice and consent requirements.[2] A qualified tax adviser should review the specific arrangement.
References
- Guardian: A guide to key person life insurance (guardianlife.com)
- Internal Revenue Service: Notice 2009-48, employer-owned life insurance (irs.gov)
- Internal Revenue Service: About Form 8925, Report of Employer-Owned Life Insurance Contracts (irs.gov)
