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Key Person Insurance: Essential for Business Transitions and Investment Security

Friday, July 5, 2024
Fred Garfield
A photo of a person filling out a Key Person Insurance form.

Many of our clients have recently undergone or are contemplating transitions of ownership in their businesses. These range from private equity investments to Employee Stock Ownership Plans (ESOPs) to key executive buyouts. Each of these situations necessitates a thorough examination of key person life and disability insurance needs to ensure smooth transitions and safeguard business continuity.

Here are a few examples of clients we have recently serviced:

  1. Key Executive Buyouts: Five key executives purchased a successful consulting business from the previous owners. Each executive not only provides significant services but also holds substantial secured debt from the sale. Key Person insurance in a bundled program allows for financing and business continuity with just one policy on each insured. In this case, more than $14,000,000 in coverage was obtained.
  2. Private Equity Business Purchases: In several instances, private equity firms have either retained the existing leadership under employment agreements or brought in an experienced replacement CEO. Private equity firms seek security for both operational continuity and loss protection, as well as financing security for their lender. Coverage amounts have ranged from $2,000,000 to $20,000,000 and have included loss protection from severe disability of the executive.
  3. Incentive Compensation for Executives: In one case, private equity focused on providing incentive compensation for their leadership executive on a tax-favored basis without equity in the company. The executive received $5,000,000 in personal life insurance protection, funded in a tax-deductible manner by the company. The policy’s cash value and tax-free growth projected an income replacement of 80% or more of the executive’s pre-retirement salary for 15 years or longer, depending on their income needs.
  4. ESOP Purchase Transactions: ESOP transactions often require significant outside financing, necessitating debt risk protection. Insurance can help finance stock redemptions if a key executive/owner unexpectedly passes away or becomes disabled before retirement. Equity life insurance can also serve as a low-risk “sinking fund” to help fund cash redemptions at retirement, with remaining death benefits acting as a “recovery of expense” in funding the insurance. ESOPs owning S-Corporation or LLC stock can use life insurance as a “triple-tax advantaged” funding option, avoiding taxes on premium payments, policy growth, and redemption distributions.

The power and flexibility of key person risk protection, deferred compensation and funding future capital needs are essential for managing risk within your business. If you have questions or are interested in reviewing your specific situation, reach out to Fred Garfield, CFP® at (708) 845-3121 or

Material posted on this website is for informational purposes only and does not constitute a legal opinion or medical advice. Contact your legal representative or medical professional for information specific to your legal or medical needs.