Key Person vs. Buy-Sell Life Insurance
Jason Stolz CLTC, CRPC
Key Person vs. Buy-Sell Life Insurance
Key Person vs. Buy-Sell Life Insurance—what’s the difference, how does each policy work, and which one fits your business? For closely held companies, the two core tools are Key Person Insurance (to stabilize operations) and Buy-Sell Life Insurance (to fund succession). Diversified Insurance Brokers has helped owners nationwide for 40+ years structure protection that preserves revenue, control, and enterprise value. Explore our broader life insurance services for businesses and see why firms work with our team.
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Compare Key Person coverage options and Buy-Sell funding structures side-by-side.
Understanding the Difference
- Key Person Insurance protects the business itself if a vital owner or employee dies. The company is usually beneficiary; proceeds bridge lost profits, fund hiring, and reassure lenders and vendors.
- Buy-Sell Life Insurance funds a legally binding buy-sell agreement among owners. Proceeds purchase the deceased owner’s equity at a pre-agreed valuation so survivors keep control and heirs receive fair value.
Quick Comparison: Key Person vs. Buy-Sell
| Aspect | Key Person Insurance | Buy-Sell Life Insurance |
|---|---|---|
| Main purpose | Stabilize operations after losing a rainmaker or specialist. | Fund ownership transfer under a written agreement. |
| Who benefits | The business entity—cash for continuity, hiring, and debt. | Remaining owners (control) and heirs (liquidity at value). |
| Owner / beneficiary | Typically the company owns, pays, and receives proceeds. | Cross-purchase or entity redemption (structure-dependent). |
| Use of proceeds | Replace profit, recruit/train, retire loans, stabilize credit. | Buy deceased owner’s shares at agreed valuation. |
| Best fit | Concentrated revenue or specialized know-how. | Multi-owner firms that need funded succession. |
How to Structure Each Policy
Key Person Insurance
- Coverage amount: Multiple of profit contribution, replacement cost, or debt exposure.
- Policy type: Term life for pure risk; permanent life when long-horizon or cash value helps (compare term versus permanent options).
- Ownership / beneficiary: Company typically owns, pays, and is beneficiary.
Buy-Sell Life Insurance
- Agreement first: Work with counsel on triggers, valuation, and funding duties.
- Structures: Cross-purchase (owners hold policies) vs. entity redemption (company owns). See examples in our Buy-Sell guide for businesses.
- Valuation method: Appraisal formula (e.g., EBITDA multiple) reviewed regularly as value changes; consider parking surplus cash at today’s current fixed annuity rates until closing.
Instant Business Life Quotes
Estimate term and permanent premiums for Key Person or Buy-Sell funding in minutes, then compare safe-money options on our annuities overview page.
Tax and Practical Considerations
- Premiums: Generally paid with after-tax dollars (confirm with your CPA).
- Proceeds: Typically income-tax-free when properly structured.
- Documentation: Keep corporate resolutions, notices of consent, and updated ownership records.
- Review cadence: Revisit death benefit and valuation every 12–24 months; coordinate with disability and business overhead expense coverage.
Why Many Firms Use Both
It’s rarely either/or. Key Person insurance protects the P&L and lender relationships; Buy-Sell funding protects the cap table and family liquidity. Deployed together, they keep customers, employees, and owners whole.
Talk to a Business Insurance Professional
We’ll map Key Person and Buy-Sell coverage to your continuity and succession plan.
Or request a quote now: Business Life Insurance Quote Form
FAQs: Key Person vs. Buy-Sell Insurance
What is Key Person Insurance?
A business-owned policy on a vital owner or employee. The company pays premiums and is beneficiary; proceeds offset lost profit, hiring/training, and debt service. See our Key Person guide for businesses.
What is Buy-Sell Life Insurance?
Coverage used to fund a written buy-sell agreement. If an owner dies, proceeds purchase that owner’s equity at a pre-agreed valuation—protecting control for survivors and liquidity for heirs. Learn more in Buy-Sell Life Insurance for Business.
How are the purposes different?
Key Person protects operations and cash flow. Buy-Sell protects the ownership structure by ensuring a funded equity transfer per the agreement.
When should a company use both policies?
Most multi-owner firms use both: Key Person stabilizes the business after a loss; Buy-Sell provides clean, funded succession. Coordinate with safe-money strategies and annuities for liquidity.
Are premiums deductible and are proceeds taxable?
Premiums are generally not deductible; death benefits are typically income-tax free if structured correctly. Confirm with your tax advisor.
Who should own and be beneficiary of the policy?
For Key Person, the company usually owns the policy and is beneficiary. For Buy-Sell, ownership/beneficiary depend on structure: cross-purchase (owners hold policies) or entity redemption (company owns). See our Buy-Sell design examples.
About the Author:
Jason Stolz, CLTC, CRPC, is a senior insurance and retirement professional with more than two decades of real-world experience helping individuals, families, and business owners protect their income, assets, and long-term financial stability. As a long-time partner of the nationally licensed independent agency Diversified Insurance Brokers, Jason provides trusted guidance across multiple specialties—including fixed and indexed annuities, long-term care planning, personal and business disability insurance, life insurance solutions, and short-term health coverage. Diversified Insurance Brokers maintains active contracts with over 100 highly rated insurance carriers, ensuring clients have access to a broad and competitive marketplace.
His practical, education-first approach has earned recognition in publications such as VoyageATL, highlighting his commitment to financial clarity and client-focused planning. Drawing on deep product knowledge and years of hands-on field experience, Jason helps clients evaluate carriers, compare strategies, and build retirement and protection plans that are both secure and cost-efficient.
