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A Complete Guide to Key Person Life Insurance

From a Life Insurance Agent in Indianapolis, Indiana

In any business—whether a small local shop or a growing corporation—some people are simply irreplaceable. When the success of your business depends on the skills, leadership, or relationships of a key individual, you’re exposed to financial risk if that person were suddenly no longer there.

That’s where Key Person Life Insurance comes in. It’s a strategic business tool designed to protect your company from the financial impact of losing a critical team member.

This guide explains what key person life insurance is, how it works, who needs it, and how we can help protect your business.

What Is Key Person Life Insurance?

Key Person (or Key Employee) Life Insurance is a life insurance policy a business purchases on the life of an important employee—such as a founder, partner, top salesperson, or technical expert.

The business:
✔ Is the policy owner
✔ Pays the premiums
✔ Is the beneficiary

If the key person dies while the policy is active, the business receives the death benefit, which can be used to help weather the financial impact of the loss.

Why Businesses Need Key Person Coverage

If a key individual passes away unexpectedly, a business may face:

Loss of revenue or clients

Increased expenses to hire and train a replacement

Reduced productivity

Decreased shareholder value

Difficulty securing financing

Key person insurance helps protect cash flow, cover recruitment costs, and stabilize the business during uncertain times.

Who Qualifies as a “Key Person”?

A key person might be:

A founder or co-founder

A CEO, president, or executive leader

A top salesperson responsible for major accounts

A technical expert with unique skills

Someone whose absence would significantly affect profits, operations, or reputation

If losing this individual would cause your business financial strain—or even jeopardize its future—key person insurance is worth considering.

How Key Person Life Insurance Works

Here’s the step-by-step process:

Business identifies a key individual
Someone whose loss could hurt the business financially.

Business buys a life insurance policy on that person
Usually a term life policy for affordability; sometimes permanent coverage.

Business pays the premiums
The business is the owner and premium payer.

The policy stays in force
As long as premiums are paid on schedule.

Death occurs while policy is in force
The business receives the death benefit as a tax-free payout.

Business uses funds to mitigate financial loss
Funds may cover expenses like hiring, debt service, lost revenue, or business continuity needs.

What the Death Benefit Can Be Used For

The death benefit can be used for a variety of business purposes, including:

Replacing lost revenue

Recruiting and training a replacement

Paying off business debt

Maintaining investor confidence

Funding buy-sell agreements

Covering day-to-day operating costs

Stabilizing cash flow

The payout is flexible—there’s no restriction on how the business uses it.

Types of Key Person Life Insurance

🧾 Term Key Person Life Insurance

Most common choice for cost-effective coverage

Provides protection for a specific number of years (10, 15, 20, or 30)

Ideal if the key person is crucial during growth years

💼 Permanent Key Person Life Insurance

Provides lifetime coverage

Can build cash value over time

More expensive but useful if long-term funding or collateral value is needed

The right choice depends on your business needs, budget, and timeline.

How Much Coverage Should You Purchase?

A common guideline is:

Coverage ≈ 3–10× the key person’s annual contribution to profits

But the ideal amount depends on:

The individual’s role

Revenue directly tied to them

Cost of hiring and training a replacement

Outstanding business debt

Future financial plans

As your local agent, I can help you calculate the coverage amount that makes sense for your business.

Key Person Insurance vs. Buy-Sell Insurance

Key Person Insurance protects the business financially if a key employee dies.

Buy-Sell Insurance funds an agreement between business owners to buy out a departing owner’s interest.

Many businesses hold both—key person to protect operations and buy-sell to protect ownership structure.

Tax Considerations

Generally:

Premiums are not tax-deductible as a business expense.

Death benefits received by the business are usually income-tax-free.

(Always confirm specific tax treatment with your tax advisor or CPA.)

Who Pays for the Policy?

Since the business owns the policy:
✔ The business pays the premiums
✔ The business files any claims and receives the benefit
✔ The business records the policy as an asset

This means the business—not the individual employee—gets the financial protection.

Benefits of Key Person Life Insurance

✔ Financial Stability

Provides funds when you need them most.

✔ Peace of Mind

You can focus on continuity and growth—not “what ifs.”

✔ Better Lending Opportunities

Some lenders view key person coverage as a sign of good risk management.

✔ Business Continuity

Helps ensure operations continue after a loss.

✔ Recruitment Support

Provides time and cash to find and train replacements.

Why Work With a Local Agent in Indianapolis?

Key person insurance is more than buying a policy—it’s about business strategy.

As an agent based in Indianapolis, I offer:

Tailored coverage analysis

Competitive quotes for key person insurance

Help with underwriting and implementation

Ongoing support as your business evolves

I work with business owners to make key person insurance practical, affordable, and effective.

Next Steps: Protect Your Business

Here’s how to get started:

Identify the key individuals in your business

Determine your financial exposure

Choose the right coverage type and amount

Get a custom quote

Put protection in place

Don’t let the unexpected disrupt your business. Key person life insurance gives you the financial cushion and confidence to focus on long-term success.