Notice, consent, reporting
Employer-owned policies must satisfy federal notice-and-consent rules to keep the death benefit excluded.
Business uses · Key person
Key-person life insurance: sizing it, owning it correctly, and where IUL adds a reserve
If your company would stagger without one specific person, key-person coverage is the insurance that pays the business — not the family — when that person dies. Here’s how to size it, the ownership paperwork that keeps the benefit tax-free, and where IUL’s cash value can do double duty as a reserve.
Who this is for: Owners and CFOs of companies that depend on a founder, rainmaker, or technical lead — and their advisors.
What it covers and how it’s sized
The business owns the policy, pays the premium, and is the beneficiary. Proceeds cover lost revenue and profit during the transition, the cost of recruiting and training a replacement, reassurance to lenders and customers, and sometimes debt the key person guaranteed. Sizing methods include a multiple of the person’s compensation, an estimate of profit attributable to them, or replacement cost plus revenue at risk — often several times salary. Lenders sometimes require it as a loan condition.
The rules that keep it tax-free — and where IUL fits
Because the employer owns the policy, federal rules require written notice to the insured and their consent before issue, plus annual reporting, for the death benefit to keep its income-tax exclusion; miss the paperwork and the proceeds can become taxable. Premiums are not deductible. Term fits a defined need — a key person expected to retire in ten years. Permanent coverage fits a founder or long-term leader, and IUL’s cash value becomes a business asset on the balance sheet: a reserve the company can borrow against, or a source of a retirement or severance benefit for the key person later (with tax treatment your CPA confirms). Whole life fits when guarantees are the priority.
The essentials
What actually matters here
Size to the damage
Lost profit, replacement cost, lender reassurance — often several times salary.
IUL cash value is a business asset
A reserve to borrow against or fund a future benefit for the key person.
IUL can genuinely fit when…
- A person whose loss would materially harm revenue or financing
- Notice-and-consent paperwork done before issue
- A CPA confirming accounting and tax treatment
- A permanent need if the key person is a founder or lifetime leader
Slow down when…
- The policy was issued without the insured’s written consent
- Coverage sized to salary alone when profit at risk is far larger
- The business expects to deduct the premiums
Straight answers
Questions people actually ask
How much key-person insurance should a business carry?
Enough to cover the damage: lost profit during the transition, recruiting and training a replacement, and reassurance to lenders and customers — commonly estimated as a multiple of compensation or profit attributable to the person, often several times salary. Lenders sometimes set a minimum as a loan condition.
Is key-person life insurance tax-deductible?
Premiums are not deductible. The death benefit is generally income-tax-free to the business if the employer-owned policy notice-and-consent and reporting requirements were satisfied before issue; otherwise proceeds can become taxable. This is general information — confirm with your CPA.
Term or IUL for key-person coverage?
Term for a defined horizon — inexpensive and sufficient. Permanent coverage for a founder or long-term leader, where IUL’s cash value becomes a balance-sheet reserve the business can borrow against or use to fund a future benefit for the key person. Whole life when guarantees matter most.
Honest, or not at all
See whether IUL actually fits your situation
Tell us a little about your goals and we'll show you the honest picture — including the guaranteed column, the real costs, and whether term or whole life does the job better. We're paid the same either way, which is why we can tell you the truth.
- We compare IUL against the simpler options first
- Illustrations explained line by line, guaranteed column first
- Your information is never sold