How Key Person Life Insurance Can Help Stabilize and Fortify Businesses

How Key Person Life Insurance Can Help Stabilize and Fortify Businesses

Author Executive Benefits Team
Date March 23, 2023

Key person life insurance and key person disability insurance can help protect companies financially following the death or injury of a valued team member.

All employees can and should play a part in an organization’s success. But every company, large or small, can identify select employees whose roles are especially significant. The sudden absence of these key people can stress a company financially and even challenge its stability.

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Key person life insurance can help a company through the transitionary period following the death of an essential member of its team. In partnerships, key person insurance can provide a strategy to position a surviving partner or partners (or shareholders) to buy the financial interests owned by the deceased partner. And key person policies may also be required by a lender or investor as a condition of financing or funding.

How Key Person Life Insurance Works

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 policy beneficiary. The company can, however, 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.

Various types of life insurance products can be used for key person coverage. The policy may include disability coverage. Serious illness or disability coverage can also be provided through a wholly separate policy from the key person life insurance.

The amount of coverage purchased varies by company, the nature of the business, and the estimated impact of the loss of the insured employee.

Who is a Key Person?

In some situations, a key employee’s value to an organization is based on product knowledge, unique skills, or extensive experience. Employees with a respected reputation or deep client relationships can also be highly valued by a company. Founders of a company, 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 insurance.

More About Key Person Life Insurance

Key person life insurance is a form of corporate owned life insurance (COLI). The policy can be structured in various ways and can even be used as an employee retention strategy if it provides lifelong coverage, and the company elects to assign it to the employee at the time of retirement.

Because of flexibility in structuring key person life insurance policies, an organization will want to consider its needs and objectives carefully and the numerous potential benefits the policy can provide.

With the key employees consent the company purchases a life insurance policy on that individual. 2 2


  • With the key employee’s consent, the company purchases a life insurance policy on that individual.
  • If the employee dies while the policy is in effect, the company receives tax-free death benefit proceeds.
  • The death benefit may be used to recruit or train a replacement employee.
  • The death benefit may offset expenses, loans, loss, or other costs related to the transitionary period. 
  • The death benefit can also be used to fund a buy-sell agreement between or among partners.


Learn more about all of the customized and comprehensive solutions available through OneDigital Insurance, Financial Services and HR Consulting.

This material has been prepared for informational 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.

Securities offered through Valmark Securities, Inc. (VSI), a member of FINRA and SIPC. Investment advisory services offered through Valmark Advisers, Inc. (VAI), an SEC registered investment advisor. Please refer to your investment advisory agreement and the Form ADV disclosures provided to you for more information. VAI/VSI are separate entities from OneDigital.

Unless otherwise noted, VAI/VSI is not affiliated, associated, authorized, endorsed by, or in any way officially connected with any other company, agency or government agency identified or referenced in this document.

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