Key person vs buy-sell — don't confuse them
Key-person insurance pays the COMPANY to survive losing someone. Buy-sell funding pays the OWNERS to buy out a deceased partner's shares. A 3-founder company typically needs both: key-person on each founder for operations, plus a buy-sell policy sized to each ownership stake.
- • SBA loans and VC term sheets often mandate key-person coverage on founders.
- • The insured must consent in writing — it's required for tax-free treatment.
- • Premiums are not tax-deductible, but the death benefit is generally income-tax-free.
Related guides
Long-form playbooks on the same topic, written by the RevenueLab editorial team.
FAQ
How much key person insurance does a business need?
The salary-multiple rule says 5–10× compensation. The contribution method says: revenue attributable × years to recover. For most founders that lands between $500K and $3M.
Who owns a key person policy?
The business — it pays the premiums, is the beneficiary, and receives the death benefit. The insured employee has no ownership (and must sign written consent).
Is key person insurance tax deductible?
Premiums are not deductible when the business is the beneficiary. The trade-off: the death benefit pays out free of income tax, which is almost always the better deal.
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