High-limit key person insurance

Yes. A business can purchase substantial key-person life insurance when the death of an owner, executive, salesperson, engineer, or other critical employee could create a major financial loss. The key to obtaining a high limit is being able to demonstrate a credible economic need for the amount requested and having the financial and underwriting documentation to support it.

A practical way to approach it

1. Identify the key person and the financial risk

   Document what would happen financially if the person died unexpectedly:

   • Lost revenue or profit
   • Lost customers/contracts
   • Cost and time to recruit/train a replacement
   • Debt or lender requirements
   • Disruption to operations
   • Loss of intellectual property or specialized expertise
   • Costs associated with buying out the person's ownership interest
   • The amount needed to stabilize the company during a transition

   The National Association of Insurance Commissioners specifically recommends tying the coverage amount to the key person's projected financial impact, including replacement costs and business buyout needs.content.naic.org

2. Build a defensible coverage calculation

   Rather than simply asking an insurer for, say, $10 million because the company wants $10 million, prepare a written analysis showing why that amount is appropriate.

   For example:

   Potential exposure	Estimated amount
   Lost profits during transition	$3M
   Customer/revenue disruption	$2M
   Recruitment & replacement	$500K
   Debt obligations	$1.5M
   Ownership buyout	$2M

3. Prepare a strong financial package

   For large cases, expect the insurer and its underwriting team to scrutinize the business itself, not just the insured person's health.

   Have available:

   • Several years of business tax returns
   • Current financial statements
   • Revenue and EBITDA/profit history
   • Balance sheet
   • Debt schedule
   • Ownership structure/cap table
   • Key-person compensation
   • Business valuation
   • Revenue/customer concentration information
   • Explanation of the person's responsibilities
   • Succession/replacement plan
   • Existing life insurance on the person
   • Explanation of how the requested death benefit was calculated

   The SBA likewise recommends maintaining financial statements, business valuation and forecasts when establishing the financial condition and value of a business.cdn.www.sba.gov

4. Use a broker experienced in large life-insurance cases

   For a multimillion-dollar policy, I would generally use an independent life-insurance broker who routinely handles high-net-worth and large corporate cases, rather than approaching only one carrier.

   The broker can submit the case informally to multiple insurers first, which can help determine:

   • Which carriers are interested
   • How much each is willing to consider
   • Whether the proposed amount is financially justified
   • Whether multiple carriers should participate

   For exceptionally large coverage, a broker may explore a layered/multi-carrier structure rather than putting the entire amount with one insurer.

5. Get the insured person's consent and handle employer-owned-life rules correctly

   If the business owns the policy and is the beneficiary, federal tax rules governing employer-owned life insurance become important.

   Under IRC §101(j), the business generally needs to provide the employee with written notice before the policy is issued, disclose the maximum face amount, obtain written consent, and inform the employee that the company will be a beneficiary.www.irs.gov+1

   This is especially important for a large policy because increasing the face amount can create additional notice/consent considerations.www.irs.gov+1

6. Structure ownership and beneficiary design carefully

   A typical key-person arrangement is:

   Business → owns policy → pays premiums → receives death benefit

   The purpose is to give the company cash when the key person dies so it can replace the person, repay obligations, maintain operations, protect creditors/customers, or execute a succession strategy. The NAIC describes this basic structure as the business owning and being beneficiary of the policy.content.naic.org

   If the intention is instead to provide money to the key person's family, fund a buy-sell arrangement, or provide an executive benefit, that's a different structure and should be designed with a tax attorney/CPA and insurance attorney.

What about a very high death benefit?

There isn't a simple universal formula such as "a company can only buy 10× salary." Insurers look at the economic justification, company financial strength, the individual's role and compensation, existing coverage, and the insurer's underwriting guidelines.

For example, a $20 million policy could potentially make sense for a founder whose death could cause tens of millions of dollars of business disruption or trigger a substantial ownership buyout. Conversely, $20 million could be difficult to justify for an employee whose measurable economic contribution is much smaller.

For a large case, I'd recommend preparing a key-person insurance justification memo before applying. It should essentially answer:

Who is the person, what economic value/risk is tied to them, what happens financially if they die tomorrow, and why is the requested death benefit a reasonable measure of that exposure?

Important tax point

Don't assume the premiums are automatically deductible simply because the insurance protects the business. Employer-owned life insurance has specific tax rules, and the treatment of premiums and proceeds depends on the arrangement. In particular, §101(j) can affect whether death proceeds are excluded from the company's gross income, which is why the notice/consent and other requirements should be handled correctly from the outset.www.irs.gov+1

Also distinguish key-person coverage from ordinary employee group life insurance. The IRS's rules for group-term coverage over $50,000 are a separate issue and can create taxable fringe-benefit consequences for employees.www.irs.gov+1

Best next step: have a CPA/CFO quantify the company's economic exposure, have an independent broker take that analysis to several carriers for preliminary underwriting, and have counsel review the ownership, beneficiary, notice/consent and tax structure before the policy is issued.

If you tell me roughly the company's annual revenue/EBITDA, the key person's compensation, their ownership percentage, the desired death benefit (e.g., $5M/$10M/$25M), and whether the purpose is business continuity, debt protection, or a buyout, I can show you how to build a defensible high-limit coverage calculation.