Key Person Life Insurance Can Help Stabilize Businesses

Describing some employees as “irreplaceable in the short term,” one recent report estimates key person insurance now comprises 57.7% of the global corporate owned life insurance market.[1]

While all employee positions contribute to an organization’s success, every company, large or small, can identify select employees whose roles are especially significant. A company's finances can be stressed when death, serious illness or injury results in the loss of a key contributor.

Depending upon the role to be filled and the company's depth, the death of a vital employee can even challenge a company’s stability. Benefit payments from a key person life insurance policy can help a company as it regroups and transitions following a significant loss. Typically, a key person policy is used to help a company:

• Offset the cost of employee recruitment, replacement and retraining.
• Fund buy-sell agreements among surviving partners or stakeholders.
• Pay loans or compensate for a decline in revenue or other hardship created by losing an essential team member.

How Key Person Life Insurance Works

Key person policies are a form of corporate owned life insurance (COLI). A company purchases a key person life insurance policy on a select employee. The company pays the premiums on the policy and designates itself as the beneficiary, making the company both the policy owner and the beneficiary. If the employee dies while the policy is in effect, the company typically receives tax-free death benefit proceeds[2].

The company can only take out a key person insurance policy with the written consent of the selected employee, provided through an employer-owned life insurance notice and consent form.

Key life policies can be structured in a variety of ways. The policy may include disability coverage, or disability can be provided as a separate policy. Key person life, also known as key man life, can even be used as an employee retention strategy if the policy provides lifelong coverage and the company elects to assign it to the employee at retirement.

In partnerships, key person insurance provides a strategy to position a surviving partner, partners, or shareholders to buy the financial interests owned by the deceased partner. A lender or investor may also require key person policies as a condition of financing or funding.

Who is a Key Person and How Much Coverage Does a Company Need?

In some situations, a key employee’s value to an organization is based on product knowledge, unique skills or extensive experience. Employees with an industry-renowned reputation or deep client relationships can also be highly valued by a company. Founders of a company, owners, C-suite leadership, top sales representatives and talented designers, engineers or product developers are all potential candidates for key person life insurance and/or key person disability.

The amount of coverage purchased varies by company, the nature of the business and the estimated impact of the loss of the insured employee. In determining the value of the individual to be insured, companies often look at cost, compensation, contribution or a combination of these factors.

• Cost assessment considers the expense to the company to recruit, hire, train and transition a new employee into the position.
• Compensation assessment factors the employee’s Total Rewards (salary plus benefits) and multiplies that amount by a value that generally correlates with the time estimated to bounce back from the loss. Often, this multiplier is between 2X and 10X.
• Assessing by contribution works well when the insured employee’s contribution to the company is directly measurable, such as average annual sales multiplied by the number of years estimated for another employee in the same role to achieve a comparable contribution.

More About Key Person Insurance

Because of the flexibility in structuring key person insurance policies, an organization will want to consider its needs and objectives carefully and the numerous potential benefits the policy can provide. Working with an executive benefits consultant to select optimal insurance products for each key employee can position a company with valued tax-efficient liquidity during an otherwise difficult time.

To learn about key person life insurance and other executive benefits strategies, we invite you to read: Deferred Compensation Plans for Retaining Valued 1099 Independent Contractors, Reasons to Reevaluate Your Rabbi Trust and How the 2025 Retirement Plan Limits Impact Highly Compensated Employees.

This material has been prepared for informational and educational purposes only, and is not intended to provide, and should not be relied on for accounting, legal or tax advice. Any tax advice contained herein is of a general nature. You should seek specific advice from your tax professional before pursuing any idea contemplated herein. The examples shown are for illustrative purposes only. The material in this report may contain financial illustrations, which may reflect hypothetical dividends, interest, rates of return, and/or expense and mortality assumptions, none of which are guaranteed.

Christine Scott is affiliated with Valmark Securities, Inc. and Valmark Advisers, Inc. Securities offered through Valmark Securities, Inc., member FINRA & SIPC. Investment Advisory Services offered through Valmark Advisers, Inc., a SEC Registered Investment Adviser. Registration as an Investment Adviser does not imply any certain level of skill or training. 130 Springside Drive, Suite 300, Akron, Ohio 44333. 800-765-5201. Valmark Securities, Inc. and Valmark Advisers, Inc. are independent of and unaffiliated with ODIA.

Some of the Financial Professionals offering corporate owned life insurance are associated with OneDigital are registered representatives of and offer securities through Valmark Securities, Inc. a registered broker-dealer, Member FINRA / SIPC. Additionally, some OneDigital Financial Professionals are also Investment Adviser Representatives and offer advisory services through Valmark Advisers, Inc., an SEC registered investment advisor. Registration as an Investment Adviser does not imply any certain level of skill or training. Additionally, Investment advisory services are also offered through OneDigital Investment Advisors LLC. To help public members determine the specific registrations associated with our Financial Professionals, we recommend reviewing the Broker Check Link or the Investment Adviser Public Disclosure website which provides insight to the securities registration and company affiliation of our Financial Professionals. Please note that while the individual Financial Professionals can be associated with multiple financial services organizations, the products and services of those independently owned and operated entities can be separate and segregate. OneDigital is a separate entity from Valmark Securities, Inc. and Valmark Advisers, Inc.

Sources:

[1]Corporate Owned Life Insurance Market Size and Share Analysis Growth Trends and Forecast (2025 – 2032) https://www.coherentmarketinsights.com/industry-reports/corporate-owned-life-insurance-market?utm

[2]https://www.supremecourt.gov/opinions/23pdf/23-146_i42j.pdf