Full Definition
Key person insurance (also called key man insurance) is a life or disability insurance policy that a business purchases on an individual whose death or incapacity would cause significant financial harm to the company. The business pays the premiums, owns the policy, and is the beneficiary. Proceeds are used to cover lost revenue, recruit a replacement, satisfy debts, or fund business continuation. Coverage amounts are typically 5-10x the key person's annual compensation or their quantified contribution to company revenue. Business-paid premiums are not tax-deductible, but death benefit proceeds are generally received income-tax-free.
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