Two of the most important — and most overlooked — business insurance strategies. What they are, how to calculate the right coverage, and how buy-sell agreements actually work.
📅 Updated November 2026⏱️ 12 min read🏢 Business owners + CPAs
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Reviewed by the DNAPolicy.org Editorial Team
Our life insurance guides are reviewed for accuracy by licensed insurance professionals and cross-referenced with current underwriting guidelines. Content is updated regularly to reflect industry changes. Last reviewed: November 2026
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Key Person Insurance
Protects the business if a critical employee or owner dies. The company owns the policy, pays the premiums, and receives the death benefit — using it to cover lost revenue, recruit a replacement, or repay debt.
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Buy-Sell Insurance
Funds a legally binding agreement between business partners. If one partner dies, surviving partners use the life insurance proceeds to purchase the deceased partner's share — keeping the business in the right hands.
Key Person Life Insurance: The Deep Dive
Every business has people without whom the company would struggle to survive. The founder who built the client relationships. The engineer whose code runs the product. The salesperson who closes 60% of the revenue. Key person insurance protects the business from the financial fallout of losing that person unexpectedly.
How Key Person Insurance Works — Step by Step
1
Business identifies the key person
Could be a founder, CEO, top salesperson, technical expert, or any individual whose loss would materially harm the business.
2
Business applies for a life insurance policy
The business is both the policy owner and beneficiary. The key person is the insured. The key person must consent and be notified (required under IRC §101(j)).
3
Business pays the premiums
Premiums are paid from business funds. They are NOT tax deductible (unlike most business expenses). The policy is a business asset.
4
If the key person dies
The business receives the death benefit income tax-free (subject to IRC §101(j) compliance). The business can use the funds to cover lost revenue, hire and train a replacement, retire debt, or reassure investors and lenders.
5
If the key person leaves the company
The business may surrender the policy, sell it to the key person, or continue it for another purpose. Many buy-sell agreements address this scenario.
Key Person Coverage Calculator
Estimate the right coverage amount using three industry-standard methods.
$
Salary + bonus + benefits
$
Directly attributable revenue
Recruit, hire, onboard, ramp
$
SBA loan or bank guarantee
7× Compensation
$1.4M
$200,000 × 7
Revenue Method
$750K
$500,000 × 1.5yr
Loan Balance
$0
No guarantee entered
Recommended key person coverage
$1.5M
Rounded to nearest $250,000
Buy-Sell Agreements: Protecting What You've Built
Imagine you co-own a business worth $2 million with a 50/50 partner. Your partner dies suddenly. Their $1 million share of the business goes to their spouse — who may have no interest in running a business, may want to sell to a competitor, or may demand a seat in management you didn't plan for.
A buy-sell agreement — funded by life insurance — prevents all of this. It pre-establishes the price, the buyer, and the funding mechanism. When a partner dies, the surviving partners use the life insurance proceeds to buy out the deceased partner's share at the agreed price. The business continues. The family receives fair value. No conflict.
The Three Types of Buy-Sell Agreements
↔️ Cross-Purchase Agreement
How it works: Each partner buys a life insurance policy on every other partner. Partner A insures Partner B; Partner B insures Partner A.
✅ Advantages
Surviving partners get a stepped-up cost basis on purchased shares (reduces future capital gains tax)
Each partner controls their own policy
Cleaner from an estate planning standpoint
⚠️ Drawbacks
Gets complicated fast — with 4 partners, you need 12 policies (n × (n-1))
Premium cost varies by age — younger partners pay less to insure older ones
Age disparities can create premium inequity
Best for: 2–3 partners, especially when tax basis matters. Most common for smaller partnerships.
🏢 Entity Purchase (Stock Redemption)
How it works: The business itself buys and owns life insurance on each partner. When a partner dies, the business collects the death benefit and uses it to redeem (buy back) the deceased partner's shares.
✅ Advantages
Simple — number of policies = number of partners
Business administers everything
Premiums are equal regardless of which partner is insured
⚠️ Drawbacks
No stepped-up basis for surviving partners
AMT (alternative minimum tax) issues possible for C-corporations
If business can't pay premiums, coverage lapses
Best for: 4+ partners, C-corporations, situations where simplicity outweighs tax basis concerns.
⏳ Wait-and-See (Hybrid)
How it works: The agreement gives flexibility — the surviving partners can first decide whether to purchase the shares personally (cross-purchase) or allow the business to do so (entity). The decision is made at the time of death based on then-current tax law and circumstances.
✅ Advantages
Maximum flexibility — choose the best structure at the time
Can adapt to changes in tax law
Often preferred by sophisticated business attorneys
⚠️ Drawbacks
More complex legal drafting
Requires careful coordination between insurance ownership and agreement terms
Must be structured correctly or flexibility advantage is lost
Best for: Businesses with competent legal and financial counsel who want future flexibility.
Buy-Sell Policy Planner
Enter your business valuation and ownership percentages to see policy requirements.
$
$
Cross-Purchase
2 policies
2 partners × 1 = 2 policies needed
Each partner insures all others individually
Entity Purchase
2 policies
1 policy per partner
Business owns and pays for all policies
Policy amounts needed per partner:
Partner A (50% ownership)$2.0M coverage needed
Partner B (50% ownership)$2.0M coverage needed
Tax Treatment — What Every Business Owner Must Know
Tax Question
Key Person
Buy-Sell (Cross-Purchase)
Buy-Sell (Entity)
Premiums deductible?
❌ No
❌ No
❌ No
Death benefit taxable?
✅ Tax-free (w/ §101(j) compliance)
✅ Tax-free to partner
✅ Tax-free to business
Stepped-up cost basis for survivors?
N/A
✅ Yes — tax advantage
❌ No
AMT exposure (C-corps)?
⚠️ Possible
❌ No (individual owners)
⚠️ Possible
Cash value growth taxable?
❌ Tax-deferred
❌ Tax-deferred
❌ Tax-deferred
Policy loan taxable?
❌ Not taxable income
❌ Not taxable income
❌ Not taxable income
§101(j) Compliance Requirement: For corporate-owned life insurance (COLI) death benefits to be received tax-free, the business must: (1) notify the insured employee in writing that the business intends to insure their life, (2) obtain the employee's written consent, and (3) report COLI policies to the IRS annually on Form 8925. Failure to comply means the death benefit above the company's cost basis is taxable as ordinary income. Work with a tax attorney to ensure compliance.
Do You Need This Coverage?
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You have a business partner or co-founder
→ You need: buy-sell
If you have partners, a buy-sell agreement funded by life insurance is not optional — it's essential. Without it, your partner's heirs inherit their share and you may have no say in what happens to your business.
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Your business has an SBA loan with a personal guarantee
→ You need: key person
Most SBA lenders require key person coverage equal to the loan balance. If you die, the loan could be called — and your business would need to repay it immediately without the coverage.
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One person drives the majority of revenue
→ You need: key person
If your top salesperson left tomorrow and clients followed them, that's a key person risk. Coverage gives the business time and capital to rebuild without that revenue.
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Your business valuation is growing
→ You need: both
The longer you wait to establish a buy-sell agreement, the higher the coverage amount needed — and the higher the premium (especially as you age). Set the agreement and coverage now, review annually.
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You're a sole owner with family members in the business
→ You need: key person + estate planning
Your situation requires a different approach — business succession planning, potentially a family buy-sell or trust. Consult an estate planning attorney.
Frequently Asked Questions
Who is considered a "key person" in a business?
A key person is any individual whose death or disability would cause significant financial harm to the business. This includes: founders and owners, CEOs and C-suite executives, top revenue-generating salespeople, technical specialists with unique knowledge or relationships, and anyone whose departure would create a major operational disruption. The test is simple: if this person died tomorrow, would the business suffer meaningful financial loss?
Who pays the premium and who gets the death benefit?
The business pays the premium — it is the policy owner. The business is also the beneficiary and receives the death benefit if the key person dies. The key person is the insured but has no ownership rights in the policy.
Are key person life insurance premiums tax deductible?
No. Key person life insurance premiums are generally not tax deductible by the business. However, the death benefit received by the business is typically income tax-free, subject to the "corporate-owned life insurance" (COLI) rules under IRC Section 101(j), which requires that employees be notified of the policy and provide written consent.
What is a buy-sell agreement and why does it need life insurance?
A buy-sell agreement is a legally binding contract between business co-owners that specifies what happens to an owner's share of the business when they die, become disabled, retire, or leave. Without one, a deceased owner's share passes to their heirs — who may have no business experience, may want to sell to a competitor, or may simply create conflict. Life insurance funds the buy-sell so surviving partners have the cash to purchase the deceased owner's share at a predetermined price, without liquidating business assets.
What is the difference between a cross-purchase and entity purchase buy-sell?
In a cross-purchase agreement, each partner buys life insurance on each other partner. If Partner A dies, Partner B collects the death benefit and uses it to buy A's share. In an entity purchase (stock redemption), the business buys a policy on each owner. If an owner dies, the business collects the death benefit and uses it to buy back the deceased owner's shares. Cross-purchase gives surviving partners a stepped-up cost basis; entity purchase is simpler to administer (especially with many partners). The right choice depends on the number of partners, their ages, and tax strategy — consult a business attorney.
How is key person coverage amount determined?
Three common methods: (1) Multiple of compensation — typically 5–10x the key person's annual salary. (2) Revenue contribution — estimate the revenue attributable to the key person multiplied by the number of years to fully replace them. (3) Lender requirement — if the business has a loan personally guaranteed by the key person, the lender may require coverage equal to the loan balance. Many businesses combine multiple methods and take the highest figure. The calculator above uses a blended approach based on these inputs.
What happens to key person insurance if the key person leaves the company?
The business owns the policy, so it can: (1) surrender the policy for its cash value, (2) sell the policy to the key person (a "transfer for value"), or (3) continue paying premiums if another arrangement exists. If the policy is sold to the key person, there are "transfer for value" tax rules that may make part of the death benefit taxable — work with a tax advisor before any transfer. Many buy-sell agreements address what happens to the policy if a partner exits while still alive.
Should a business also have key person disability insurance?
Absolutely — and this is one of the most overlooked risks. A key person is statistically more likely to become disabled than to die during their working years. Key person disability insurance pays a monthly benefit to the business if the key person becomes unable to work. Buy-sell disability insurance funds a buyout if a partner becomes permanently disabled. Many advisors recommend both life and disability coverage for key persons and business owners.
Protecting your business starts with the right policy.
Key person and buy-sell coverage is straightforward to obtain — the hard part is knowing you need it. You do.