The business
Applicant and owner
The company applies for the policy and owns it, subject to the contract and any assignment. Owning it is what gives the business control over it.
Moon Insurance Managers, Inc. · TDI license #5595
Key Person Insurance for Houston Businesses
One person often holds more than one job: the client relationships, the technical knowledge, the license the company trades under, the judgment that keeps things moving. If that person dies, the loss is personal — and it is also, immediately, a cash problem for the business.
Key person insurance is life insurance the business owns on an owner or key employee whose loss would materially affect the company. The business pays for it and the business is the beneficiary. What it buys is time; what it cannot do is replace the person, and no honest page will tell you it guarantees the company survives.
26 U.S.C. § 101(j) Employer-owned life
What federal law asks, and when
- Notice and consent
- Before the policy issues
- Owner-employees
- Not excused, Notice 2009-48
- Annual reporting
- IRS Form 8925
- Premiums
- Generally not deductible
- Insurable interest
- Tex. Ins. Code ch. 1103
Agent of record
- 41years in Houston
- 20+markets compared
- Same dayDPS filing
- #5595TDI license
The structure
Four roles, and who fills each
Most of the confusion about this subject disappears once the roles are named separately, because three of the four belong to the same party and people assume that means they are the same thing.
The owner or employee
Insured person
The insurer evaluates that specific person’s life and the amount requested. Their health, age and occupation drive the underwriting, and their participation is required — which is not a formality, as the next section explains.
The business
Premium payer
The company pays. Whether those premiums are deductible is a tax question with a general answer most owners find surprising, and it is below.
The business
Beneficiary
A payable death benefit goes to the company. This is the whole distinction from a personal policy, where a spouse, child, trust or estate usually receives it.
That structure is exactly what distinguishes this from personal life insurance, where a spouse, child, trust or estate is usually the beneficiary. A business owner can need both arrangements, because the family and the company are facing two different losses from the same event.
Source: NAIC — insurance for small business. Verified .
Sequence matters
Notice and consent come before the policy
This is the part of the subject that cannot be repaired afterwards, which is why it sits above the coverage discussion rather than below it.
Federal tax rules for employer-owned life insurance generally require, before the contract is issued, that the insured person receives written notice of the intent to insure them and of the maximum face amount, gives written consent — which may include consent to the coverage continuing after employment ends — and receives written notice that the policyholder will be a beneficiary.
A misconception worth correcting directly: a wholly owned corporation’s owner-employee is not excused from written notice and consent. Being the only shareholder does not remove the requirement, and assuming it does is a common and avoidable error.
An applicable policyholder with one or more employer-owned life contracts may also have annual reporting on Form 8925. Say “may” and ask your tax adviser — this page will not tell you how to file, and we are not your tax counsel.
Sources: IRS — Notice 2009-48, employer-owned life insurance; IRS — About Form 8925. Verified .
Not a job title
Deciding who counts
The useful question is not whether someone is senior. It is what the business would actually lose. A quiet operations manager can be far more load-bearing than a vice-president with a title and a parking space.
- Whose absence would stop revenue arriving, not just make work harder.
- Who holds the client or supplier relationships that would leave with them.
- Who holds a license, certification or approval the business trades on.
- Whose technical knowledge is not written down anywhere.
- Whose personal guarantee or standing supports a loan or a lease.
- Who would take months and real money to replace, if a replacement exists at all.
There is also a legal dimension the business does not decide on its own: Texas has rules governing insurable interest and beneficiary interests in life insurance, and whether a proposed owner and beneficiary satisfy them is case-specific. It is a question for legal advice rather than for a general test on a page.
Source: Texas Insurance Code — Chapter 1103. Verified .
What it can help with
What the benefit is actually for
Buy time
The most valuable thing it does. Cash in the weeks after a death lets a company make decisions on its own schedule instead of the bank’s.
Recruit and train a replacement
Search costs, a premium salary to attract someone quickly, and the months before they are productive.
Reassure lenders and customers
Both tend to ask questions immediately. A funded plan is a better answer than an intention.
Cover obligations while revenue dips
Continuing costs do not pause, and the revenue attached to that person may.
Fund an orderly transition
Whether that means a handover, a restructure or a sale on sensible terms rather than forced ones.
Note the verb throughout: can help. A death benefit is money, and money buys options. It does not restore a relationship a customer had with a person, and it is not a promise about the company’s future.
Reasoning about the number
How much, and on what basis
Rules of thumb circulate on this subject and none of them survives contact with a real business. A defensible amount is built from a need and a timeline:
- What the business would actually lose, in revenue or margin, and for how long.
- How long a realistic replacement search and handover would take.
- What it would cost to recruit and pay that replacement.
- Any loan, lease or contract that depends on this person or on the company’s stability.
- What the business would need to keep operating through the gap.
Two separate questions sit behind the final figure. The first is what the business needs. The second is what an insurer will issue on that person, which is decided by underwriting — their age, health and occupation, and the insurer’s own view of the amount relative to the business. Nobody can settle the second one in advance.
General rules, not advice
The tax questions owners ask
Premiums. Generally not deductible when the taxpayer is directly or indirectly a beneficiary of the policy — which is the ordinary arrangement here. Owners frequently expect the opposite, so it is worth establishing early.
Proceeds. Life-insurance death proceeds are generally excluded from income, with exceptions. Employer-owned life insurance has its own rules on top, and that is precisely why the notice-and-consent sequence above and the annual reporting matter as much as they do.
Both of those are general statements of federal rules, not advice about your company. Ownership, beneficiary designation, any assignment to a lender, an existing agreement between owners, the premium treatment and the reporting all need your tax adviser and your attorney before you act on them.
Sources: IRS — Publication 334, tax guide for small business; IRS — life insurance proceeds guidance. Verified .
A related, separate question
Funding an ownership transfer
Owners often raise both subjects in the same breath, and they are not the same. Arranging for one owner’s share to pass to the others starts with a written agreement between them — who buys, on what terms, at what valuation — drafted with legal and tax advice. Insurance can fund what that agreement requires, but it follows the agreement rather than substituting for it.
Key person coverage answers a different loss: the operating hole left by the person, not the transfer of their stake. A business can need both, and the order matters — the agreement first, then the funding.
No obligation
Start with the need, not the product
Tell us what the business does, who the business would struggle without, and what would actually happen in the first three months. We will work through the structure, the sequence, and what your tax adviser and attorney will need to weigh in on.
Nothing sensitive through the form, please. Dates of birth, Social Security numbers, medical history, financial statements, agreements and loan documents all come later, by phone or through a secure route we will name.
Monday to Thursday, 9:00 to 5:00; Friday, 9:00 to 4:00. 360 FM 1959, Houston, TX 77034. Policies written statewide — you do not have to be local.
Key person questions we get every week
What is key person insurance?
Life insurance a business owns on an owner or employee whose loss would materially affect the company. The business applies, owns the policy, pays the premium and is the beneficiary. If the insured person dies while the policy is in force and the claim is payable, the benefit goes to the business. It cannot replace the person, and it should never be described as a guarantee the company survives.
Who can be a key person?
Anyone whose absence would materially affect the business — which is a question about consequences, not job titles. It is frequently an owner. It can equally be the salesperson holding the client relationships, the licensed professional the business trades under, or the one person who knows how the operation actually runs.
How much key person coverage does a business need?
There is no formula worth trusting. The amount should be tied to an economic need and a recovery timeline: what would be lost, for how long, what replacing that person would cost, and what obligations depend on the company staying stable. What an insurer will issue is a separate question again, decided by underwriting.
Is key person insurance the same as personal life insurance?
No — the beneficiary is different, and so is the problem. A personal policy generally pays a spouse, child, trust or estate, and it exists to protect a family’s income. This pays the business, and it exists to protect the company’s ability to keep operating. An owner can genuinely need both, because the family and the company face different losses.
Is it the same as buy-sell insurance?
No. Funding an ownership-transfer arrangement is a separate question that starts with a written agreement between the owners, drafted with legal and tax advice. The insurance follows the agreement rather than the other way round. Key person coverage addresses the operating loss; it is not a substitute for that agreement.
Does the owner or employee have to consent?
Yes, and the timing is critical. Under federal tax rules for employer-owned life insurance, the arrangement generally requires written notice of the intent to insure and the maximum face amount, written consent — which may include consent to coverage continuing after employment ends — and written notice that the policyholder will be the beneficiary. This generally has to be completed before the policy is issued. A wholly owned corporation’s owner-employee is not excused from it. Ask your tax adviser to confirm the sequence for your situation before anything is submitted.
Are the premiums deductible, and how are the proceeds treated?
Premiums are generally not deductible when the taxpayer is directly or indirectly the beneficiary of the policy, which is the usual arrangement here. Death proceeds are generally excluded from income, with exceptions — and employer-owned life insurance has its own rules, which is exactly why the notice-and-consent sequence and the annual reporting on Form 8925 matter. None of that is tax advice, and all of it belongs with your tax adviser before you rely on it.
What happens if the key person leaves?
The business owns the policy, so it decides what to do with it — keep it, stop it, or in some circumstances transfer it, subject to the contract and to tax and legal advice. Consent obtained at the outset may have covered coverage continuing after employment ends, which is one reason the wording of that consent is worth getting right the first time.