Is the key person death benefit tax-free to the company?

Only if IRC §101(j) was satisfied: the employee received written notice and consented in writing BEFORE the policy was issued, and the company files Form 8925 with its return. Miss those steps and the death benefit above premiums paid is ordinary income. If your business owns a policy and nobody remembers signing a consent, that’s a free review — the fix is much cheaper before a claim than after.

Term or permanent for key person coverage?

Term insures the risk at the lowest premium and is the honest default for a pure lender requirement or a defined window — a key contract, a buyout runway. Permanent costs more but builds company-owned cash value and never outlives its usefulness the way a 10-year term does when the key person is still key in year 11. Many designs layer both: permanent base, term rider for the peak-exposure years.

Can key person insurance fund the employee’s retention package too?

Yes — and it’s one of the more elegant designs in the book. The same permanent policy that protects the company can informally fund a deferred-compensation or §162 executive bonus arrangement: golden handcuffs for the employee, protection for the business, one premium doing two jobs. Design and documentation matter; this is built with your CPA, not around them.

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The Person Who IS the Business

If one funeral would sink the company, the company is uninsured.

Every closely-held business has at least one person whose death would stop revenue cold — the founder who holds the relationships, the rainmaker who holds the pipeline, the operator who holds the whole thing together. Banks know it: key-person coverage is routinely a lending condition. Most owners find that out at the loan closing, not the planning table.

Key person insurance is company-owned coverage on that person’s life. The business pays the premium, the business is the beneficiary, and the death benefit lands as liquidity in the exact quarter the company needs to replace revenue, calm the bank, recruit a successor — or wind down on the owners’ terms instead of a creditor’s.

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The §101(j) trap almost nobody flags

Since the Pension Protection Act of 2006, employer-owned life insurance death benefits are TAXABLE unless the notice-and-consent rules of IRC §101(j) were satisfied before issue — written notice to the insured, written consent, and Form 8925 filed annually. Policies put in force without it turn a tax-free benefit into ordinary income. We design around §101(j) from day one and review existing policies that weren’t.

Premiums, honestly

Key-person premiums are not tax-deductible (IRC §264) — anyone who tells you otherwise is selling. The trade: after-tax premiums in, income-tax-free death benefit out when §101(j) is handled. For a business, that is still the cheapest liquidity that arrives exactly on the worst day.

Cash value works for the company too

Structured as permanent coverage, the policy builds cash value the business can access — a balance-sheet asset, borrowable for the slow season or the expansion, that doubles as an informal funding source for the key employee’s own retention package.

Asked Across the Desk

Key Person Insurance — the honest answers.

The working conventions are a multiple of the key person’s compensation (commonly 5–10×) or their share of revenue or profit contribution over a realistic replacement window — the years it takes to recruit, train, and season a successor. Lenders often set their own floor as a loan condition. We model it from your P&L, not a rule of thumb: what revenue actually walks out the door, and how long until it walks back in.

Other exposures

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