Identify the business loss
Key-person insurance is generally owned by the business to provide liquidity after a critical person's death. A buy-sell arrangement funds some or all of an ownership transfer. Family income protection is a third need and usually has a different beneficiary. After defining the business obligation, test the funding amount with the life insurance coverage needs estimator using business-specific assumptions.
Estimate lost revenue, replacement time, debt covenants and transition costs rather than using a salary multiple alone.
Match the policy to the agreement
Buy-sell agreements can use entity-purchase or cross-purchase structures, among others. The agreement should define the triggering event, valuation, purchase obligation and funding shortfall. Policy proceeds do not automatically complete a sale without enforceable documents.
Confirm insurable interest, consent and notice requirements with qualified advisers.
Why the details matter
A company buys $1 million on each owner, but the agreement values one share at $1.6 million. The insurance provides liquidity but does not fully fund the purchase. The owners must document how the remaining $600,000 would be paid.
Review tax and accounting treatment
Premium deductibility, proceeds, ownership transfers and employer-owned life insurance rules can be complex. Business accounting also affects how cash value and premiums appear. Do not rely on a sales illustration for a tax conclusion.
Use business, tax and legal professionals who can review both the policy and agreement.
Questions to take to an adviser
- Record owner, insured and beneficiary for every policy.
- Keep written consent and notices.
- Update business valuation on a schedule.
- Model the gap if proceeds are insufficient.
Maintain the plan after business changes
Review after a new owner, departure, loan, merger, valuation change or change in key responsibilities. Decide what happens to coverage when an insured leaves or ownership is sold.
Keep personal family coverage separate so a business change does not unexpectedly remove household protection. Reconcile policy cash values and ownership with the company's books, and document whether a departing owner can purchase or receive any policy.
Calculate business loss and agreement funding separately
Key person coverage protects the business from a measurable loss linked to one person, such as lost revenue, recruiting costs, loan pressure or a delayed project. Buy sell funding provides money for an ownership transfer under an agreement. The same death can trigger both needs, but they should not be counted as one unexplained amount.
The agreement should identify valuation method, buyer, seller, trigger, payment timing and how insurance proceeds are used. Compare the policy owner and beneficiary with that design. Review after ownership changes, new debt, valuation changes or a key person's role changes. Tax and legal treatment depends on the structure, so use qualified advisers.
Questions to take to an adviser
- Document the business loss calculation.
- Match policy ownership to the legal agreement.
- Reconcile coverage with the current valuation.
- Review notice, consent and tax requirements.
Why the details matter
Funding example: A $1 million company value does not automatically require a $1 million key person policy. Ownership purchase funding and the operational loss caused by a death are different calculations.
Authority and professional scope
This guide explains the insurance framework, not an individual legal or tax result. Coordinate the cited authority with current documents and appropriately licensed advice. Use the life insurance glossary for plain-English contract definitions.