What Key Person Life Insurance Is — and Who Owns It
Key person life insurance is a life insurance policy where the business is the owner, the premium payer, and the sole beneficiary. The policy insures the life of a specific employee or owner whose death or disability would cause significant financial harm to the company.
The insured employee has no ownership interest in the policy. They cannot designate beneficiaries, borrow against the policy, or name a successor. When they die, the death benefit goes to the business, not to the employee’s family. The family may separately receive assets from the employee’s estate, but they have no claim to the key person policy proceeds.
This three-part structure (business owns, business pays, business collects) is what makes key person insurance different from personal life insurance. Under O.C.G.A. § 33-24-3, a Georgia business has an insurable interest in the life of any employee, officer, or director whose death or disability would create a financial loss to the company. That insurable interest is the legal basis for the policy.
Death and disability are separate products. Key person life insurance pays out when the insured dies. Key person disability insurance pays a monthly benefit if the insured becomes disabled and cannot work. Most Georgia business owners who buy one should consider the other. A disability is statistically more likely than a death during working years, and the business impact is nearly identical.
When a Georgia 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 uncertain, key person insurance is the right tool.
Revenue concentration is the most common trigger. If a single salesperson generates 40% of revenue, or if the founder holds all client relationships, the business is exposed. The death benefit buys time to replace that revenue or wind down the business in an orderly way.
Personally guaranteed business loans create a separate exposure. Many Georgia business owners personally guarantee SBA loans, commercial real estate loans, or lines of credit. When the guarantor dies, lenders can call those loans. A key person policy sized to the outstanding loan balance eliminates that risk. The business pays off the loan with the death benefit before the lender can act.
Buy-sell agreements require funding. A buy-sell agreement between co-owners is a contract that controls what happens to each owner’s equity when they die. The agreement means nothing if the surviving owners cannot pay for the deceased owner’s equity. Key person insurance is the most common funding mechanism. The business or surviving owners use the death benefit to buy the deceased owner’s interest from their estate at the pre-agreed price. For a full explanation of how buy-sell agreements work in Georgia, see What Is a Buy-Sell Agreement for a Georgia Business Owner.
Sole proprietors face a different problem. A sole proprietorship has no legal existence separate from its owner. It dissolves the moment the owner dies. Key person insurance does not solve this problem. What a sole proprietor needs is to convert to an LLC and build a succession plan before death. See What Happens to a Georgia Sole Proprietorship When the Owner Dies for why the structure matters.
How Much Coverage Do You Need — Three Calculation Methods
There is no single right answer, but there are three standard methods. Most Georgia business owners use one as the starting point and adjust based on their situation. Underwriters typically cap coverage at 10 times the insured’s annual income.
1
Salary Multiple Method
Multiply the key person’s total annual compensation (salary plus bonuses) by 5 to 10. A conservative estimate uses 5x; a higher multiplier is appropriate when the person’s contribution is more difficult to replace. Example: $200,000 in annual compensation × 7 = $1.4 million in coverage.
2
Revenue Contribution Method
Estimate the percentage of annual revenue or profit directly attributable to the key person, then multiply by the number of years it would take to replace them. Example: Key person generates $500,000 per year in attributable revenue, replacement timeline is 2 years = $1 million in coverage.
3
Replacement Cost Method
Add the cost of recruiting, hiring, onboarding, and training a replacement, plus the revenue lost during the transition period. For highly specialized roles (technical founder, licensed professional, lead surgeon), this method often produces the largest number and the most accurate figure.
If the business has outstanding loans personally guaranteed by the key person, add the loan balance to whichever method produces the highest number. The loan coverage and the replacement coverage serve different purposes, both need to be funded.
The Tax Rules Every Georgia Business Owner Must Know
Premiums are not tax-deductible. Under IRC § 264(a)(1), a business cannot deduct premiums paid on a life insurance policy when the business is directly or indirectly the beneficiary. Key person insurance premiums are paid with after-tax dollars. This applies to both life and disability variants.
Death benefits are generally tax-free, with one condition. Under IRC § 101(a), life insurance death benefits are excluded from the business’s gross income. But for employer-owned policies (COLI), this exclusion only applies if the business complied with IRC § 101(j) before the policy was issued.
IRC § 101(j) requires two steps, completed before the policy is placed in force:
1
Written Notice to the Employee
The employer must notify the employee in writing that the business intends to insure their life, the maximum face amount at issuance, and that the employer will be the beneficiary of the policy proceeds. This notice must be given before the policy is issued.
2
Written Consent from the Employee
The employee must consent in writing before the policy is placed in force. The consent must be obtained, not just offered. If the employee never signs the consent form and the policy is issued anyway, the death benefit becomes fully taxable as ordinary income to the business.
Annual reporting is also required. For any employer-owned life insurance policy issued after August 17, 2006, the business must file IRS Form 8925 every year, reporting the number of employees insured and the total coverage in force. Many Georgia small business owners are unaware of this requirement, failure to file is a compliance gap, not a tax-free death benefit problem, but it signals to the IRS that notice-and-consent procedures may not have been followed.
Georgia conforms to federal income tax treatment for life insurance proceeds under O.C.G.A. § 48-7-21. There is no separate Georgia tax on key person death benefits that comply with IRC § 101(a) and § 101(j).
Key Person Insurance and Buy-Sell Agreements — What Changed in 2024
Most Georgia business owners who use key person insurance to fund a buy-sell agreement use an entity-purchase structure: the business owns the policies on all owners, collects the death benefit when one owner dies, and uses that money to buy the deceased owner’s interest from their estate.
In June 2024, the U.S. Supreme Court issued a unanimous decision in Connelly v. United States that changed the tax math for every entity-purchase structure in the country, including Georgia businesses.
What Connelly held: When a business receives life insurance proceeds under an entity-purchase buy-sell agreement, those proceeds must be included in the company’s fair market value for estate tax purposes. The redemption obligation. The company’s promise to buy back the deceased owner’s shares, does not offset the insurance proceeds for valuation purposes.
In the Connelly case, a $3.5 million life insurance payout increased the estate’s tax bill by $889,914 that would not have existed under the pre-Connelly valuation method. The surviving brother had to pay nearly $900,000 more in estate taxes on a business he was simultaneously buying back.
The alternative is a cross-purchase structure: each owner purchases a policy on the other owners and is the beneficiary directly. When one owner dies, the surviving owners receive the death benefit personally and use it to buy the deceased’s interest. They get a stepped-up basis in the acquired shares equal to the purchase price. The business’s fair market value is not inflated by insurance proceeds it already had to pay out.
If your Georgia business currently has an entity-purchase buy-sell agreement funded by life insurance, the Connelly decision is a reason to review the structure with an estate planning attorney now, not after a death occurs. For a full overview of business succession planning options in Georgia, see Business Succession Planning for Georgia Business Owners.
What Happens If You Die Without Key Person Insurance
The business enters probate under Georgia law. A court controls what happens next. For a Georgia LLC, the operating agreement governs whether the business continues or dissolves. For a sole proprietorship, the business ceases the moment you die.
Personally guaranteed loans become a crisis on day one. Your estate is liable for those balances. Lenders who learn of your death can call the loans. Without insurance proceeds to pay them off, the estate may be forced to sell business assets at distressed prices to satisfy the debt.
Your co-owners are left without a funded exit. A buy-sell agreement without insurance is a promise with no cash behind it. Your co-owners may be legally required to buy your interest but unable to pay for it. Your estate may be forced to accept unfavorable payment terms, or the buy-sell may collapse entirely, leaving your heirs as involuntary co-owners of a business they cannot run.
Your family inherits a problem, not an asset. A business that depends on you to operate loses its goodwill, its client relationships, and its revenue the day you die. Without insurance to bridge the gap, the business your family inherits may be worth a fraction of its value on the day before your death.
For a full picture of what Georgia probate does to a business, see What Happens to a Georgia Business During Probate. For the specific documents a Georgia business owner needs to protect both the business and the family, see What Happens to a Georgia Business When the Owner Dies Without a Succession Plan.
