How Does Key Person Life Insurance Work?

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Key person life insurance is a financial tool used by businesses to help ensure business succession, generate business capital, and as an incentive for hard-to-replace employees. But how does key person life insurance work, and is right for your company? Keep reading to find out how to set up and use a key person life insurance policy.



Before you can purchase key person life insurance, you need to have an insurable interest in the person you’re trying to insure. This means you would be financially impacted if that person were to unexpectedly pass away. In business, this likely applies to executive level employees and partners, top salespeople and talent, or anyone else whose unique skills make them difficult to replace. As a business owner, you may also take out a key person insurance policy on yourself.


Once you’ve determined insurable interest, you’ll need to apply for an insurance policy. Key person life insurance is offered either as a term policy, where coverage expires after a certain date, or a permanent policy, where a death benefit payout is guaranteed for life. Permanent key person life insurance costs more, but it also comes with several living benefits that can be used by the business and/or the insured during their lifetime.

There are three parties involved with a key person policy

  1. The Policyholder — The person who owns the policy and pays the premiums, typically the businesses.
  2. The Insured — The person who is covered on the policy and on whom a death benefit will be paid, typically the employee.
  3. The Beneficiary — The person or entity receiving the death benefit on the policy; typically the business but can be changed to the employees family if they retire or leave the company.

In addition to completing an insurance application, the insured person may also need to fill out a health questionnaire and/or complete a medical exam. Not all key person life insurance policies require medical exams, but as the policyholder, you’ll likely get a more favorable rating (and insurance premium) with an exam.

The Wealth Strategists at Paradigm Life work with the nation’s top-rated mutual insurance companies to find the best key person life insurance policies for your business, prioritizing your company’s unique needs and goals, whether they be generating business capital, creating business succession play, or utilizing life insurance as part of a key employee compensation package. What’s more, our experienced team will guide you through the application process and help schedule any medical exams needed.

Schedule a free virtual consultation with a Paradigm Life Wealth Strategist here.


When the insured person on a key person policy passes away, the death benefit is typically paid to the company who owns the policy. These funds can be used to hire and train a new employee, purchase partner shares in the company (called a buy-sell agreement), or cover outstanding debts left by the insured (common if the insured is also the business owner). 

As previously mentioned, when a business opts for a permanent key person life insurance policy instead of a term policy, there are additional benefits that can be accessed while the insured person is still living. Permanent policies have a built-in savings account called cash value that can be borrowed tax-free and used by a business for capital. What’s more, if a participating whole life insurance policy is used, cash value earns a guaranteed rate of return plus non-guaranteed dividends.

If a key person retires or leaves the company, they can buy the policy from the policyholder or it can be structured as part of the insured’s compensation package. At this point, the beneficiary is typically changed to the family of the insured, and the insured assumes responsibility for paying remaining premiums. The insured can now use the policy’s cash value to fund their own investments, retirement, or major purchases.

At Paradigm Life, we know that millions of people follow out-of-date financial advice that prohibits the future they deserve. Perpetual Wealth 101 consists of a series of free videos that teach you The Perpetual Wealth Strategy™ and guide you to a secure financial future.

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