Life Insurance for Business Owners: Core Planning Basics

Key person life insurance (also called key man insurance) is a life insurance policy owned by a business on the life of a person whose death would cause significant financial harm to the business. The business pays the premiums, is the beneficiary, and receives the death benefit. The funds can be used to recruit and train a replacement, service business debt, pay buyout obligations to the deceased's family, reassure investors and lenders, or simply sustain operations during a difficult transition.

For small businesses where one person drives most of the revenue, a restaurant owner, a licensed contractor, a real estate team leader, key person insurance is often the difference between business survival and closure. It is one of the most underused business risk management tools for Nevada small businesses.

A buy-sell agreement is a legally binding contract between business partners that establishes what happens to a partner's ownership interest upon death, disability, or retirement. Life insurance funds the agreement by providing the liquidity needed to purchase the deceased partner's share from their estate. Without funding, the surviving partners may not have cash to buy out the family, leading to the deceased partner's family becoming unwanted business partners.

Two structures are common: cross-purchase (each partner owns a policy on each other partner) and entity-purchase (the business owns policies on each partner and buys back the interest). The right structure depends on the number of partners, tax considerations, particularly the step-up in cost basis advantage of cross-purchase, and ownership percentages. Consult a business attorney and CPA before choosing a structure.

Generally, premiums paid by a business on life insurance policies where the business is the beneficiary are NOT tax deductible per IRC Section 264. Key person insurance premiums and buy-sell funding premiums are not deductible. However, the death benefit received by the business is generally income-tax-free, a significant back-end tax advantage that offsets the non-deductibility of premiums.

There are exceptions: group term coverage for employees (up to $50,000 of coverage per employee) is deductible as a business expense and excluded from the employee's income. For split-dollar and executive benefit arrangements, the tax treatment is more complex and arrangement-specific. Always consult your CPA for your specific situation before assuming tax treatment.

A common rule of thumb is 5–10 times the key person's annual contribution to business revenue or compensation. For a Nevada small business owner generating $200,000 in annual net revenue, a $1M–$2M key person policy may be appropriate. More specifically, the amount should reflect: the cost of recruiting and training a replacement, outstanding business loans that would be called, lost revenue during the transition period, and any buyout obligation to the key person's estate.

Lenders who have made business loans may require key person insurance as a loan condition and may specify the required coverage amount. In that case, the lender's requirement may set the floor, though additional coverage beyond the lender's requirement may still be appropriate to protect the business's full financial exposure.

Yes, solo business owners often have the highest business life insurance need precisely because they are the entire key person risk. There is no partner to continue operations, no second revenue driver to soften the impact. For a solo business owner with SBA loans or other business debt and personal guarantees, the business life insurance need is direct: ensure those debts can be repaid without forcing a business asset sale or placing liability on the estate.

For single-member LLCs and sole proprietors, the distinction between "business" and "personal" life insurance needs is often less clear, but the coverage needs are just as real. A coordinated plan covering business debt, key person risk, and personal income replacement is essential. Sasson works with solo Nevada business owners to structure coverage that addresses all three needs efficiently.

Both are used for buy-sell funding, and the right choice depends on the business's timeline and budget. Term life insurance is common for younger business owners, it provides large coverage at low cost during the years when the buy-sell risk is highest and business value may be lower. Permanent life insurance (whole life or universal life) is used when the buy-sell obligation is expected to remain in force indefinitely, particularly in businesses expected to remain privately held for the long term.

Many buy-sell arrangements use term with a conversion option, starting with affordable term coverage and converting to permanent as the business value (and thus the buyout obligation) grows over time. This avoids underwriting risk while keeping premiums manageable in the early years of the business.