Key Employee Life Insurance in New England
Key employee insurance is a life insurance policy taken out by a business on the life of a key employee to help protect the company in the event of an unexpected death. A key employee is anyone whose loss would have a significant impact on the business — the owner, a partner, a top salesperson, or an employee whose specialized knowledge and contributions are genuinely difficult to replace. The purpose of key employee insurance is to help the business survive the blow of losing the person who makes it work.
Cleary Insurance works with Massachusetts and New England business owners to identify their key person exposures and structure coverage that provides the company with the financial resources it needs to continue operating, recruit a replacement, and manage the transition.
How Key Employee Insurance Works
The business is both the owner and the beneficiary of the policy. Premiums are paid by the business, and if the insured employee dies, the death benefit is paid to the company — not to the employee’s family. The business can use those proceeds to cover lost revenue during the transition, pay for recruiting and training a replacement, retire business debt that the key person’s relationships or credit supported, or simply provide a financial cushion while the company stabilizes.
Key employee insurance is most commonly written as term life insurance for a defined period, but whole life or universal life policies are also used when the business wants to build cash value alongside the death benefit protection.
Frequently Asked Questions
Who qualifies as a key employee for insurance purposes?
A key employee is typically defined as someone whose death would cause a measurable financial loss to the business. This commonly includes the business owner or founder, a partner or co-owner, a top revenue producer, an executive with irreplaceable client relationships, and technical specialists with expertise that would be expensive and time-consuming to replace. The definition is flexible — the question Cleary asks is: if this person died tomorrow, what would it cost the business?
How much key employee insurance does a business need?
Coverage amounts are typically based on the estimated financial impact of losing the key person. Common approaches include a multiple of the key employee’s compensation (often five to ten times annual salary), the estimated cost of recruiting and training a replacement, the projected lost revenue during the transition period, or outstanding business debt supported by the key employee’s personal guarantee or relationships. Cleary will work through the right calculation for your specific situation.
What is the tax treatment of key employee insurance?
Premiums paid on a key employee life insurance policy are generally not tax-deductible by the business. However, the death benefit proceeds received by the business are typically income-tax-free under federal law, with some exceptions for larger C corporations that may be subject to the corporate alternative minimum tax. Massachusetts follows federal tax treatment for most purposes. Cleary recommends coordinating with your tax advisor when structuring key employee coverage.
What happens to a key employee policy if the employee leaves the company?
Because the business owns the policy, the business controls what happens to it if the key employee leaves. Options include surrendering the policy for its cash value (if any), transferring ownership of the policy to the departing employee as part of a severance arrangement, or continuing the policy if the business still has an insurable interest. The right approach depends on the policy type and the circumstances of the departure. Cleary will review the options when that situation arises.
Is key employee insurance the same as buy-sell insurance?
No. Key employee insurance protects the business against the financial loss caused by an employee’s death — the proceeds go to the company. Buy-sell insurance funds the purchase of a deceased or disabled owner’s interest in the business, transferring ownership to the surviving partners or the company. Many businesses need both: key employee coverage to protect ongoing operations, and buy-sell coverage to handle the ownership transition. Cleary often structures both as part of the same planning engagement.