Life Insurance
Key Person Insurance
Key person insurance—also called key man insurance—is a life insurance policy owned by a business entity on the life of an individual whose death would cause significant financial loss to the company, with the business named as beneficiary to offset recruitment costs, lost revenue, or loan repayment obligations.
Last reviewed: May 2026 · Editorial methodology
Definition
Key person life insurance is purchased by a company to protect against the economic loss that would result from the death of an employee whose knowledge, relationships, or leadership are critical to business operations—typically a founder, CEO, top salesperson, or lead engineer. The business owns the policy, pays the premiums, and is the named beneficiary; premiums are not deductible to the corporation under IRC Section 264, and death benefits are received income-tax-free under IRC Section 101(a) subject to notice-and-consent requirements. Coverage amounts are typically calculated as a multiple of the key person's annual compensation (often five to ten times) or as the estimated cost of business disruption, recruitment, and replacement training. A $5 million key person policy on a 45-year-old founder might cost $8,000–$15,000 per year in annual premiums depending on health and whether term or permanent coverage is selected. Permanent key person policies build cash value that can serve as an informal corporate reserve or be used to fund a buy-sell agreement upon retirement. Banks frequently require key person insurance as a condition of commercial loans when the business's creditworthiness is tied to an individual.
Where this term matters
💡 Tip
Related terms
Related guides
Cover Forge USA Editorial Team
Editorial Lead
This article was researched and written by the Cover Forge USA editorial team against federal sources (NAIC, CMS, FEMA, DOL, SSA, state DOIs) and standard policy forms. Bylines organize content by topic — they do not assert individual licensure. See our editorial-policy for details.
Reviewed 2026-06-14
Get Insurance Rate Alerts
We monitor rate filings in all 50 states. Get notified when rates change in your area — and discover new ways to save.
- ✓State-specific rate change alerts
- ✓Seasonal enrollment deadline reminders
- ✓Expert tips to lower your premiums
- ✓New coverage options in your state
Free forever. Unsubscribe with one click. No spam, ever.
Important Disclaimer
This site provides general educational information only and is not a substitute for professional insurance advice. All rates, data, and coverage details are estimates and may not reflect your actual premiums. Insurance availability and pricing vary by state, insurer, and individual risk factors. Always consult a licensed insurance professional in your state before making coverage decisions.