Blog Series: Planning Your Business Legacy
Series Overview
Over the next six weeks, we’ll dive deep into essential business insurance tools that help owners protect what they’ve built, plan for seamless transitions, and minimize risk. Here’s the roadmap:
Key Person Insurance
Buy-Sell Agreements
Cross-Purchase Agreements
Entity Purchase Agreements
Funding Strategies for Buy-Sell (Life Insurance vs. Alternatives)
Common Pitfalls & Compliance Considerations
This Week’s Article: Key Person Insurance
What Is Key Person Insurance?
Key person insurance is a life or disability policy purchased by your business on the life of an individual whose expertise, relationships, or leadership are critical to your company’s success. If that person unexpectedly leaves, becomes disabled, or passes away, the policy proceeds provide a financial cushion.
Helps offset lost revenue, recruitment costs, and disruption
Covers founders, top salespeople, technical experts, or any “rainmaker”
Business owns the policy, pays premiums, and is the beneficiary
Why Every Business Owner Should Consider It
Losing a key individual can stall growth and shake investor confidence. Insurance proceeds offer flexibility to:
Recruit and onboard a suitable replacement
Cover debt repayments or revenue shortfalls
Maintain operational stability during the transition
With proper coverage, you can help maintain cash flow and reassure lenders, partners, and stakeholders that your enterprise is resilient.
Calculating Your Coverage Needs
Determining the right face amount involves:
Quantifying the worst-case financial impact (lost sales, project delays).
Estimating recruiting and training expenses for a replacement.
Adding a buffer for debt obligations or temporary bridging capital.
A thorough needs analysis ensures you neither underfund nor overpay for coverage.
Policy Structure and Tax Treatment
Most key person policies are structured as permanent life insurance (e.g., whole life, universal life) or disability buy-out policies. From a tax standpoint:
Premiums are generally not tax-deductible to the business.
Death-benefit proceeds are received income-tax free, providing maximum liquidity.
Disability-benefit proceeds are typically taxable if premiums were deducted, so review your structure carefully.
Consult your tax advisor to align policy design with your tax and cash-flow goals.
Integrating Key Person Insurance into Your Risk Plan
Key person coverage should sit within a broader risk-management framework:
Regularly review policy amounts as your business grows and roles evolve.
Coordinate with your buy-sell agreement to ensure funding sources align.
Combine with other liability and property coverage for comprehensive protection.
A cohesive approach prevents overlaps and uncovers any coverage gaps.
Action Steps for Business Owners
Identify up to three individuals whose loss would materially harm operations or profits.
Work with your advisor to run a coverage-needs analysis based on revenue impact and replacement costs.
Compare quotes from multiple carriers, paying attention to policy structure and premium stability.
Review with your legal and tax teams to confirm alignment with long-term exit or succession plans.
Taking steps to help protect your “key” players today can help support your company’s future for tomorrow.
Up Next: Next week we’ll explore Buy-Sell Agreements—what they are, why you need one, and how to tailor it to your ownership structure. Stay tuned!
Protect your business’s future by scheduling a complimentary risk-assessment with our team. Let’s review your key person coverage, discuss funding strategies, and tailor a plan that keeps your operations running smoothly when challenges arise.
Reach out today at (219) 312-4128 or email aaron@pattenfinancial.com to get started.
#KeyPersonInsurance #BusinessInsurance #RiskManagement
Investment advisory services offered through Redhawk Wealth Advisors, Inc., an SEC Registered Investment Advisor. SEC Registration does not imply any level of skill or understanding. Redhawk Wealth Advisors and Patten Financial Group are unaffiliated and separate legal entities.
