Business insurance should be sized from the agreement and the balance sheet, not from a round number.
Key person coverage pays the company when someone it depends on dies or cannot work. Buy-sell funding makes sure owners can actually afford to buy each other out. Both are business problems before they are insurance problems, so we start with the agreement, the valuation and the lender, then place the coverage that fits.
The amount comes from what the loss would cost the company, not from a salary multiple.
A key person policy is owned by, and payable to, the business. Sizing it means deciding what the money has to do.
Replacing the Person
Recruiting, overlap and the months a successor needs to reach full productivity all have a cost. We build that estimate with you, because it is the number an underwriter will ask you to justify. A documented replacement cost supports the right key person life insurance amount.
Protecting Revenue
When a founder holds the key relationships or a producer carries a book, the exposure is lost profit. We tie the face amount to margin at risk, so the coverage is defensible and not simply the largest amount available. Tying coverage to margin makes key person insurance defensible.
Satisfying the Lender
Loan covenants often require coverage on named individuals, assigned to the bank. We read the covenant first, since a policy that does not match its terms can leave the loan out of compliance. Matching the policy to the loan covenant keeps the business compliant with its lender.
Employer-owned life insurance has a paperwork test, and failing it taxes the death benefit.
Under Section 101(j), when a business owns a policy on an employee, the employee must be notified in writing and consent before the policy is issued, including notice that the business will be the beneficiary. Miss it and the proceeds above premiums paid become taxable income to the company.
Notice Before Issue
The notice must state that the company intends to insure the employee’s life and the maximum face amount. We build it into the application packet, so it cannot be skipped between signature and delivery. The notice and consent rules under Section 101(j) protect the tax-free death benefit.
Consent That Lasts
Consent should cover continuing the coverage after the employee leaves. Without it, keeping a policy on a former employee creates a problem the company will not see until a claim. Consent signed before issue, stating coverage may continue after employment ends, protects the tax treatment of key person life insurance.
Reporting Every Year
Businesses holding employer-owned contracts report them on IRS Form 8925 with their tax return. We give your CPA the policy inventory each year, so the filing matches what is actually in force. Accurate Form 8925 reporting keeps employer-owned life insurance compliant each year.
An unfunded buy-sell agreement is a promise the surviving owners cannot keep.
The agreement sets the price; insurance supplies the cash. The structure decides who owns the policies, how many are needed and how the payout affects value.
Entity Redemption
The company owns one policy per owner and buys back the shares. It is simple to run, but the Supreme Court’s Connelly decision held that proceeds can raise the company’s value for estate tax, which changes the math for some owners. Counsel decides whether it still fits.
Cross-Purchase
Each owner holds a policy on every other owner, which usually gives survivors a better tax basis. The number of policies climbs quickly with each owner added, which is why larger groups hold them in a trust or separate entity.
Disability Buy-Outs
An owner who is permanently disabled is still an owner. Disability buy-out coverage funds the purchase after a waiting period, so the agreement must use the same definition of disability as the policy. Matching disability definitions keeps a buy-sell agreement enforceable.
Keeping the Price Current
A valuation formula set years ago rarely matches today’s business. We flag when coverage and the agreed price have drifted apart, so an owner’s family is not left arguing over the difference. Regular valuation reviews keep buy-sell funding current with what the business is actually worth.
What owners ask about insuring the business.
Are the premiums deductible?
Premiums on a policy the business owns and benefits from are generally not deductible, and the death benefit is generally received free of income tax when Section 101(j) is satisfied. Your CPA confirms the treatment for your entity. Section 101(j) compliance protects the income-tax-free death benefit on key person life insurance.
Should the buy-sell use term or permanent coverage?
Term costs less and fits when the concern is an early death. Permanent coverage fits when the agreement is also meant to fund a retirement buy-out. The answer follows the agreement’s triggers, not the premium. The buy-sell agreement’s triggers drive the choice of coverage.
What happens to the policies when an owner leaves?
The agreement should say. When it does not, policies end up owned by the wrong person or lapse unnoticed, so we review the ownership map whenever the ownership of the business changes. Regular ownership reviews keep buy-sell policies aligned with the agreement.
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