There are four categories of loss for which key person insurance can provide coverage:

• Losses related to the extended period when a key person is unable to work, to provide temporary personnel and, if necessary to finance the recruitment and training of a replacement.
• Insurance to protect profits. For example, offsetting lost income from lost sales, losses resulting from the delay or cancellation of any business project that the key person was involved in, loss of opportunity to expand, loss of specialized skills or knowledge.
• Insurance to protect shareholders or partnership interests. Typically this is insurance that enables shareholdings or partnership interests to be purchased by existing shareholders or partners.
• Insurance for anyone involved in guaranteeing business loans or banking facilities. The value of insurance coverage is arranged to equal the value of the guarantee.

Who is defined as a key man (person)?
A key person can be anyone directly associated with the business whose loss can cause financial strain to the business. For example, the person could be a director of the company, a partner, a key sales person, key project manager, or someone with specific skills or knowledge which is especially valuable to the company.

Taxation
With both key man life and disability insurance, the business secures the policy on the life of the key person. It will own the policy, pay the premiums and be the beneficiary in the event the key employee dies or is disabled. The premium payments made by the company are not tax deductible but in most cases, the proceeds received are income tax free. Death benefits on life insurance owned by a C Corporation may be subject to the corporate Alternative Minimum Tax (AMT).

Proceeds on key-man policies in an S-Corporation are essentially trapped in the corporation. Any distribution of that cash to surviving S-Corporation shareholders – or to the estate of the deceased shareholder – triggers a taxable event.