Key Person Life Insurance: A Small Business Planning Guide

Start with the work that would stop

List the responsibilities that currently depend on one person. For a contractor, those might include estimating projects, supervising crews, and maintaining customer relationships. For a software firm, they might include understanding a proprietary system and approving releases. A respected employee is not automatically a major financial dependency; document the specific work and the consequences of losing that capability.

Ask the team who could take over each responsibility tomorrow, how much training that person would need, and which decisions require formal authority. Record the difference between a backup who understands a process and a backup who is actually authorized to use accounts or sign contracts. Insurance cannot supply the missing permission, technical knowledge, or customer confidence. Cross-training and documented access procedures may reduce the disruption you are considering insuring.

• Which person controls a large share of new sales or contract renewals?
• Which approvals, credentials, or specialized knowledge have no trained backup?
• How long would customers tolerate delayed service?
• Who could manage payroll and communicate with lenders during a transition?

Estimate a transition budget, not just a salary multiple

Consider a hypothetical four-person design business. Its senior engineer supervises active projects and brings in several major clients. The owners want enough liquidity to hire temporary technical help, recruit a replacement, and keep a cash reserve during uncertain collections. They prepare a six-month planning budget with their accountant. These invented numbers demonstrate a method; they are neither coverage recommendations nor a prediction of claim proceeds.

The worksheet has $45,000 for temporary support, $20,000 for recruitment and training, and $60,000 for operating reserves. Those categories total $125,000 before adjustments for existing cash or other commitments. The owners also model a longer interruption. They do not add the engineer's entire annual revenue to the budget: revenue, profit, replacement expense, and working capital are different measures. Counting the same loss twice would inflate the estimate.

Separate business protection from family protection

A company receiving proceeds does not mean the employee's family receives that money. Draw a simple diagram naming the insured person, proposed policy owner, proposed beneficiary, and intended use of funds. Then make a separate diagram for any personal coverage. An owner can have both a business role and a family role, but those obligations should not be hidden inside one vague promise to protect everyone.

If the same person is also an equity owner, ask whether an ownership purchase is another funding need. Money intended to buy an ownership interest may not remain available for payroll afterward. Conversely, a business continuity policy does not create a purchase agreement with an owner's heirs. Review any overlap with counsel and the accountant. The goal is to avoid allocating the same expected proceeds to two conflicting commitments.

Review ownership and consent before the application is finished

Employer-owned life insurance can carry special federal tax requirements. IRS Notice 2009-48 discusses written notice and consent, and the IRS provides Form 8925 for reporting qualifying employer-owned contracts. Ask a CPA and attorney which requirements apply to the proposed arrangement and when documents need to be completed. Do not assume being a shareholder, having verbal permission, or paying premiums from a business account settles those questions.

Give the advisers the proposed ownership and beneficiary details before coverage is issued. Keep the reviewed documents with the company's insurance records, identify who maintains them, and establish a reminder for any required reporting. If an employee leaves, the company is sold, or ownership of a policy changes, request another review. A personnel change and a policy change can have different consequences, so neither should be handled through an informal email alone.

Match the coverage discussion to the business timeline

Write down how long the dependency may last. A founder planning to sell in seven years has a different question from a company expecting to rely on a specialist for decades. Ask an insurance professional to compare the coverage duration, premium commitments, renewal provisions, and any conversion options in writing. For a policy with cash value, request an explanation of guarantees, charges, and exit costs instead of treating projected values as available business cash.

Test affordability during a weak revenue quarter, not only during a successful year. Identify who would notice a missed payment and who can speak with the insurer. Avoid designing a plan that depends on continually increasing sales to pay the premium. If the budget will not support the proposed coverage, reconsider the amount, duration, reserve strategy, or operational dependency with your advisers. A smaller sustainable plan can be more useful than an ambitious policy the business cannot maintain.

Make a decision file the team can maintain

Create a short decision file containing the dependency map, budget assumptions, adviser questions, and approved ownership diagram. Record why a coverage amount was selected and what would trigger a review. A new major customer, an acquisition, a successful cross-training program, or a reduced debt balance may change the business exposure. Revisit the plan when the work changes, rather than renewing the same estimate indefinitely.

For an initial conversation with Che', a high-level description of the business and the role is enough. Keep tax returns, confidential customer contracts, medical details, identification numbers, and employee consent records out of a general website inquiry. Ask for an appropriate private process if an insurer or adviser needs detailed documents. You can call or text (817) 888-2858 to discuss how to prepare. A consultation is a planning conversation, not an assurance that coverage or a claim will be approved.

Common questions