What Key Person Life Insurance Is, and Who Owns It
Key person life insurance is a policy where the business is the owner, the payer, and the one who gets paid. It insures a specific employee or owner. Their death would hurt the company financially.
The insured employee has no ownership interest in the policy. They cannot name a beneficiary. They cannot borrow against it or pick a successor. When they die, the payout goes to the business, not to their family.
Under O.C.G.A. Section 33-24-3, a Georgia business can insure the life of any employee, officer, or director whose death would cause it a financial loss. That rule is what makes the policy legal to write.
Key person life insurance only pays if the insured person dies. A related plan covers a different risk. It is key person disability insurance. It pays a monthly amount if that person cannot work due to injury or illness. This is more common than death during someone’s working years. Many Georgia owners carry both types.
When an Atlanta Business Needs This Coverage
Not every business needs key person insurance. The test is simple. If one person died tomorrow, would the business survive the next 12 months? If the answer is no, or you are not sure, this coverage is the right tool.
Revenue concentration is the most common trigger. If one salesperson or founder holds most of the client relationships, the business is exposed the moment that person is gone.
Many Atlanta business owners have personally guaranteed a loan, like an SBA loan or a line of credit. When the guarantor dies, lenders can call those loans right away. Coverage sized to the loan balance removes that risk.
Some SBA and commercial lenders make key person life insurance a condition of the loan. It is not just a good idea, it can be required. This usually happens when loan repayment depends on one or two people. It also happens when there is not enough other collateral. Check your loan agreement, or ask your lender directly. Requirements vary by bank and loan type.
A buy-sell agreement between co-owners also needs funding to mean anything. Key person insurance is the most common way to fund it. Surviving owners use the payout to buy the deceased owner’s share at the price already agreed on. For more, see What Is a Buy-Sell Agreement in Georgia? For the full list of risks a Georgia business faces without a plan, see Problems With Business Succession Plans in Georgia.
How Much Coverage You Need
There is no single right answer, but three methods cover most cases. Underwriters usually cap coverage at 10 times the insured’s annual income.
1
Salary Multiple Method
Multiply the key person’s total annual pay by 5 to 10. Example: $200,000 in pay times 7 equals $1.4 million in coverage.
2
Revenue Contribution Method
Estimate the revenue tied to that person. Multiply it by the years it would take to replace them. Example: $500,000 a year, a 2-year replacement, equals $1 million in coverage.
3
Replacement Cost Method
Add the cost to recruit, hire, and train a replacement. Add the revenue lost during that transition too. This method often gives the largest number for specialized roles.
If the key person has a personally guaranteed loan, add that balance to whichever method gives the highest number. The two amounts protect against different risks.
The Tax Rules Every Atlanta Business Owner Must Know
Premiums are not tax-deductible. Under IRC Section 264(a)(1), a business cannot deduct premiums on a policy where it is the beneficiary. You pay these premiums with after-tax dollars.
Death benefits are usually tax-free under IRC Section 101(a). But IRC Section 101(j) requires the business to meet two rules before the policy is issued, or that tax-free treatment is lost.
1
Written Notice to the Employee
Tell the employee in writing, before the policy is issued, that the business plans to insure them. State the coverage amount and that the business will be the beneficiary.
2
Written Consent From the Employee
Get the employee’s written consent before the policy takes effect. If they never sign, the death benefit becomes fully taxable as regular income.
Any policy issued after August 17, 2006 also requires one more step. The business must file IRS Form 8925 every year. It reports how many employees are insured and the total coverage in force. Georgia follows the same federal tax rules under O.C.G.A. Section 48-7-21.
Key Person Insurance and Buy-Sell Agreements: What Changed in 2024
Most Atlanta business owners fund a buy-sell agreement with an entity-purchase structure. The business owns the policies on each owner. It collects the payout and uses it to buy the deceased owner’s share.
In June 2024, the U.S. Supreme Court ruled on this setup. In Connelly v. United States, the court found a hidden cost. Life insurance proceeds must be counted in the company’s value for estate tax purposes. The promise to buy back the shares does not lower that value.
In the actual Connelly case, a $3.5 million payout raised the estate’s tax bill by $889,914. That was on top of the cost of buying back the shares.
A cross-purchase structure avoids this problem. Each owner buys a policy on the other owners directly. When one dies, the survivors use the payout to buy the shares themselves. They also get a stepped-up basis in what they bought (their cost for tax purposes resets to today’s value, so they owe less tax if they sell later). If your business uses an entity-purchase agreement, review it now, not after a death. See Cross-Purchase vs. Entity Redemption Buy-Sell Agreement in Georgia for a full comparison.
A Georgia sole proprietorship needs a different fix. A sole proprietorship has no legal existence separate from its owner, it ends the moment the owner dies. Key person insurance does not solve this problem. A sole proprietor who wants the business to continue should convert to an LLC and build a succession plan before death. See What Happens to a Georgia Sole Proprietorship When the Owner Dies for the full picture.
What Happens Without Key Person Insurance
- Personally guaranteed loans become a crisis on day one. Your estate is liable for the balance, and lenders who learn of your death can call the loan.
- Your co-owners are left with a buy-sell agreement they cannot fund. Your estate may be forced into unfavorable payment terms.
- The business loses the relationships and goodwill that depended on you. It often loses much of its value before your family can sell or continue it.
For the full picture, see What Happens to a Georgia Business When the Owner Dies. If you are ready to talk through your options, our business succession planning service builds the plan around what your business needs. See what estate planning costs for a business owner for exact pricing.
