Life Insurance for Business Owners: Key Person and Buy-Sell Basics

Life insurance for business owners does two jobs: it protects your family, and it protects the business you've built. Beyond a personal policy, many owners use key person coverage to help the company survive the loss of someone essential, and buy-sell funding so partners can buy out a deceased owner's share. Each one solves a different problem.

Quick answer: Start with personal coverage for your family, since you likely don't have group coverage to fall back on. Then consider key person insurance, owned by the business, to cover lost revenue and replacement costs, and life insurance to fund a buy-sell agreement among owners. Work with your attorney and CPA, because ownership and beneficiary setup matter.

Start with your family

Many business owners in Alpharetta and across North Fulton are self-employed or run small companies without group life insurance. Even if your company offers a group plan, it may be small and tied to the business.

Your family still depends on you. A personal policy, often term, can:

• Replace your income
• Pay off your mortgage and personal debts
• Cover college and final expenses
• Give your spouse time to decide what to do with the business

If you've personally guaranteed a business loan, your family may also want coverage to handle that obligation. Size this policy first, then look at what the business needs.

Key person insurance

A key person policy covers someone whose loss would seriously hurt the business. That's often the owner, but it can also be a top salesperson, a lead engineer, or a manager who holds critical relationships.

Here's how it usually works:

1. The business owns the policy. It pays the premiums.
2. The business is the beneficiary. If the key person passes away, the business receives the death benefit.
3. The money keeps the company going. It can cover lost revenue, pay to recruit and train a replacement, reassure lenders and customers, or pay down business debt.

To size key person coverage, owners often look at the person's contribution to profits, the cost to replace them and how long it would take the business to recover. There's no single formula, and your CPA can help with the numbers.

Buy-sell agreements and how life insurance funds them

A buy-sell agreement is a legal contract between business owners. It spells out what happens to an owner's share if they die, become disabled or leave. Without one, a deceased owner's share may pass to their family, who may not want to run the business, or who may need cash rather than a stake in a company.

Life insurance gives the surviving owners the money to buy that share at a price set by the agreement. The deceased owner's family gets cash, and the remaining owners keep control.

There are two common structures:

Some agreements use a trust or other setup to manage policies when there are many owners. The right structure depends on your business entity, the number of owners and your tax situation. That's a conversation for your attorney and CPA, with us helping on the insurance side.

Other ways business owners use life insurance

Depending on your situation, life insurance can also help with:

• Loan requirements. Some lenders ask for life insurance as part of a business loan.
• Succession planning. Making sure a family member or key employee can take over smoothly.
• Executive benefits. Some companies use permanent policies as part of benefits for key employees.
• Estate equalization. If one child inherits the business, a policy can help leave a fair share to the others.

Each of these uses of life insurance for business owners has its own setup and tax rules. Business-owned policies can be treated differently than personal ones, so the details matter.

Life insurance for business owners: things to get right

• Get the ownership and beneficiary right. The wrong setup can create tax issues or send money to the wrong place.
• Keep the buy-sell agreement and coverage in sync. As the business grows, the agreed value and coverage may need updating.
• Document key person coverage properly. Your advisors can help with any notice or consent steps.
• Review every few years. New partners, a sale or a change in value all call for a fresh look.

You can read more about how we work with owners on our business owner life insurance page. We work alongside your attorney and CPA, and we don't give legal or tax advice.

Frequently asked questions

Is life insurance for business owners tax-deductible?

Don't assume they are. Tax treatment depends on who owns the policy, who the beneficiary is and what the coverage is for, so check with your CPA before buying.

What's the difference between key person insurance and a buy-sell policy?

Key person coverage protects the business from losing someone important, and the business receives the money. Buy-sell coverage funds the purchase of a deceased owner's share, so the family receives cash and the surviving owners keep the business.

Should I use term or permanent life insurance for my business?

Term often works for key person coverage and buy-sell needs tied to a specific period. Permanent coverage may fit long-term succession or estate goals. Many owners use a mix based on cost and how long the need will last.

Do sole proprietors need business life insurance?

Sole proprietors may not need buy-sell coverage, but personal coverage is important, especially if the business has debts or your family relies on its income. Key person coverage may also matter if you have essential employees.

Next step

Life insurance for business owners works when your family plan and business plan fit together. Book a free policy review with TDN Academy at our downtown Alpharetta office, by phone or by video, or call 470-777-7460. We'll compare carriers and coordinate with your attorney and CPA.

This article is for general education and is not tax, legal or investment advice. Coverage, features and pricing vary by carrier, state and individual underwriting.