Key person insurance keeps the business alive. A funded buy-sell keeps it yours. The first pays the company cash to survive the economic hole a critical person leaves behind. The second pays whoever is buying the departing owner's interest so the shares don't land in the hands of a spouse, an heir, a bankruptcy trustee, or a competitor. They are sized differently, owned differently, and taxed differently — and in the Southeast small and mid-market businesses we look at, one of the two is usually missing, stale, or technically broken in a way nobody has noticed.
Key person coverage is business-owned, business-paid, business-beneficiary life insurance (and often disability) on someone whose absence would measurably damage the enterprise. That is not always an owner. It is frequently the estimator who prices every job, the one licensed qualifying agent whose license the company's contractor registration hangs on, the sales lead who personally holds 60% of the customer relationships, or the operations manager who is the only person who knows how the schedule actually works.
Three sizing methods, and it's worth running all three rather than picking one:
| Method | How it works | Best when |
|---|---|---|
| Multiple of compensation | Roughly 5–10× total comp | Quick sanity check; the person's pay reflects their value |
| Contribution to profit | Gross profit at risk × years to recover (often 2–5) | Sales-driven or relationship-driven roles |
| Replacement cost | Recruiting + relocation + above-market pay + ramp-up gap | Technical, licensed, or hard-to-hire roles |
| Lender or surety requirement | A number someone else sets for you | Any business with a bank line or a bonding program |
That last row matters more than owners expect. Banks routinely condition a line of credit on key person coverage assigned as collateral, and surety companies underwriting a contractor's bonding program want to see that the business survives the loss of the person whose experience justified the bonding capacity in the first place. If you carry either, check the loan documents and the indemnity file — you may already be contractually required to hold coverage you never bought or that lapsed years ago.
This one is worth its own section because it is invisible until it isn't. Under the employer-owned life insurance rules enacted in 2006, when a business owns a policy on an employee, the death proceeds are only excluded from the business's taxable income if a specific sequence happened before the policy was issued:
There is also an annual reporting obligation on IRS Form 8925. Get this wrong and a seven-figure death benefit can arrive as taxable income to the company — in the same quarter you lost the person. It generally cannot be fixed retroactively; the practical remedy is a correctly-issued new policy. If you own key person coverage bought more than a few years ago, the ten-minute version of this article is: go find the signed consent form. Then confirm with your CPA.
A buy-sell agreement is a contract among owners (or between owners and the entity) that says what happens to an ownership interest when a triggering event occurs. Most owners who have one had it drafted at formation, funded it never, and haven't opened it since.
Triggering events worth having in writing, not just death:
| Cross-purchase | Entity redemption | |
|---|---|---|
| Who owns the policies | Each owner, on each other owner | The business, on each owner |
| Number of policies | n × (n−1) — 3 owners = 6, 5 owners = 20 | One per owner |
| Basis step-up for survivors | Generally yes | Generally no |
| Administrative load | Heavy above three owners | Light |
| Creditor exposure of the cash | Personal policies, outside the business | Business-owned, exposed to business creditors |
Hybrid or wait-and-see structures give the entity a first option and the owners a second, deferring the choice until the event happens. They are more flexible and more complex; whether the flexibility is worth the drafting cost is a conversation for your attorney.
A buy-sell is only as good as the number in it. Three approaches, in descending order of how often they cause a fight:
A practical middle path many closely-held businesses use: a stated value reaffirmed annually in the minutes, with an appraisal fallback if the stated value is more than a set number of months stale. Whatever the method, the insurance amount should be revisited against it every year, because a growing business quietly outgrows its funding.
Level term funds most small-business arrangements, and the pricing is usually the least difficult part of the conversation.
| Insured profile | 20-year level term, $1M face | Notes |
|---|---|---|
| Age 40, healthy, non-tobacco | ~$400–$800/yr | Best-class pricing; medical exam typically required |
| Age 50, healthy, non-tobacco | ~$900–$1,800/yr | Build, blood pressure, and A1c drive the class |
| Age 60, healthy, non-tobacco | ~$2,500–$6,000+/yr | Term length options narrow at this age |
| Tobacco use or rated health class | 2–5× the above | Worth shopping across carriers; underwriting varies widely |
| Permanent (whole or guaranteed UL) | Several times term | Does not expire — the right answer when the need is lifelong |
Illustrative ranges only, not quotes. The expensive mistake here is almost never the premium. It's the term length: a twenty-year policy bought at 48 to fund a buy-sell expires at 68, which is roughly when the need becomes real. If the owners intend to hold the business past the term, either buy permanent for a portion or make sure the term is convertible without evidence of insurability — and calendar the conversion deadline, because it is usually earlier than the expiry date.
Key person and buy-sell funding fall in the crack between the property-casualty agent, the CPA, the attorney, and whoever sold the life policy — which is exactly why they go stale. They belong on the same annual review as the rest of your program, alongside the coverages that protect the balance sheet in the other direction: business interruption for lost income after a physical loss, directors and officers for management decisions, and commercial crime for internal theft.
For contractors, there's a second reason it matters. Surety companies underwrite continuity as hard as they underwrite financials — they want to know the business survives the loss of the person whose experience justified the bonding capacity. A funded buy-sell and key person coverage are part of what a surety looks at, which we cover in how surety prequalification differs from insurance underwriting.
Bettr Coverage is an independent commercial insurance agency serving Georgia and the wider Southeast. We're not going to pretend a life insurance policy is a substitute for your attorney drafting the agreement or your CPA structuring the tax side — it isn't. What we do is the part that keeps falling through: read the buy-sell you already have, compare the funding actually in force against the number in the document, check whether the notice-and-consent paperwork exists, flag term policies that expire before the need does, and coordinate the answer with your CPA and attorney instead of selling around them. One agency, one relationship, every line reviewed together.
Send us the agreement and your current policies. We'll tell you what the document says the price is, what the insurance in force would actually pay, and where the gap is — at no charge.
Get a free coverage reviewKey person pays the company to survive losing a critical person: replacing lost gross profit, repaying a line of credit, recruiting a replacement. Buy-sell pays whoever is buying the departing owner's interest, so the shares don't end up with an heir, a spouse, or a creditor. Different sizing, different owner, different math.
Run three methods: 5–10× compensation, gross profit at risk × years to recover, and full replacement cost including ramp-up. Then check whether your bank or surety already requires a specific amount. Most Southeast small and mid-market businesses land between $500,000 and $5 million per person.
Cross-purchase generally gives survivors a basis step-up but needs n×(n−1) policies — six for three owners, twenty for five. Redemption is one policy per owner and far simpler, but historically no step-up, and the proceeds sit inside the business exposed to business creditors. Decide it with your CPA and attorney.
For employer-owned life insurance, the insured must get written notice of the coverage and maximum face amount, give written consent, and be told the employer may stay a beneficiary after employment ends — all before the policy issues, plus annual Form 8925 reporting. Miss it and the death benefit can be taxable income to the company. It's generally not fixable after the fact.
The Supreme Court held in 2024 that redemption life insurance proceeds count toward the company's fair market value for federal estate tax, with no offset for the redemption obligation. Most small businesses are under the federal exemption and unaffected; larger closely-held companies with redemption-funded plans should revisit the structure with counsel.
Generally no, when the business is a direct or indirect beneficiary. The trade-off is that the death proceeds are generally income-tax-free — assuming the notice-and-consent and reporting requirements were met and there's no transfer-for-value issue. Talk to your CPA before restructuring anything.
Twenty-year level term at $1M runs roughly $400–$800/yr for a healthy non-tobacco 40-year-old, $900–$1,800 at 50, and $2,500–$6,000+ at 60. The costly mistake isn't the premium — it's a term that expires before the owners do. Check convertibility and calendar the conversion deadline.
For general information only. Not legal, tax, or accounting advice, and not a quote or contract of insurance. Buy-sell structuring, entity choice, valuation, and the tax treatment of employer-owned life insurance are legal and tax questions — work with your attorney and CPA. Tax rules, court decisions, and IRS reporting requirements change and are applied to specific facts; nothing here should be relied on for your situation. Premium ranges are illustrative, not filed rates, and vary by age, health class, tobacco use, face amount, term length, carrier, and state. Coverage subject to policy terms, underwriting, and carrier appetite.