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Business life insurance is any policy that exists because of the business: key person coverage that replaces the value of someone the company cannot afford to lose, buy-sell coverage that gives surviving owners the cash to buy out a deceased owner's family, coverage a lender requires before it funds a loan, and policies used to reward and keep key employees. The purpose decides who owns the policy, who the beneficiary is, how much a carrier will approve and how the money is taxed, so the structure matters as much as the price.
We are licensed insurance brokers, not CPAs or attorneys. Treat the tax and legal points on this page as general education, and confirm them with your own CPA or attorney before acting.
On this page
The four jobs life insurance does for a business
Most of the owners we talk to already have some personal life insurance. What they usually do not have is coverage tied to the business itself. That gap shows up the day an owner or a key employee dies, because the business suddenly needs cash at the exact moment it has lost the person who produced it.
Business life insurance does one of four jobs. Each one is set up differently, and mixing them up causes real problems later.
| Job | Who usually owns the policy | Who gets paid | Where to start |
|---|---|---|---|
| Replace a key person | The business | The business | Key person insurance |
| Fund a buy-sell agreement | The other owners, the business, or an insurance LLC | Whoever must buy the shares | Cross-purchase vs entity redemption |
| Satisfy a lender | The owner, with the lender as collateral assignee | Lender first, family gets the rest | SBA loan requirements |
| Reward and keep key people | The employee (or the business, under split dollar) | The employee's family | Section 162 bonus plans |
A single owner can need all four. Picture two partners in a 12-person company with an SBA loan and one irreplaceable operations manager. That is one policy per partner assigned to the lender, a buy-sell policy on each partner, and key person coverage on the manager, and possibly a bonus plan to keep the manager from leaving.
Ownership and beneficiary decide the taxes
Life insurance death benefits are generally received free of federal income tax under Section 101(a) of the tax code. That headline is true for most business policies, but three rules change the answer:
- Employer-owned policies need written notice and consent before they are issued. If a business owns a policy on an employee (owners count) and skips the Section 101(j) paperwork, the death benefit above the premiums paid can become taxable. Details in our 101(j) guide.
- Selling or transferring a policy can make the payout taxable. The transfer-for-value rule taxes the death benefit when a policy changes hands for value, unless an exception applies. Moving policies between co-owners of a corporation is the classic trap.
- Company-owned proceeds count toward the company's value. Since the Supreme Court's 2024 Connelly decision, life insurance a corporation collects to redeem a deceased owner's shares is part of the company's value for estate tax, with no offset for the redemption obligation.
Premiums are a separate question. When the business is the beneficiary, premiums are not deductible (Section 264). When the business pays for coverage that benefits an employee's family, the premium is usually deductible compensation and taxable to the employee. Our guide to whether your business can pay for your life insurance walks through each entity type.
How much coverage carriers will approve
Carriers will not insure a business for whatever number you pick. Each purpose has its own way of justifying the amount:
- Key person: many carriers start around 5 to 10 times the person's total compensation, and some go higher for established companies with documentation. Our key person calculator runs three common valuation methods.
- Buy-sell: the owner's share of a supportable business value, usually backed by a recent valuation or tax returns. The buy-sell funding calculator shows the coverage and policy count for each structure.
- Loans: the lender's requirement, which for SBA loans is often tied to the part of the loan not covered by collateral.
- Personal coverage: a multiple of earned income that shrinks with age. See how much life insurance you can get.
Those limits stack. A carrier looks at all the coverage in force and applied for across every company, so it helps to apply for business and personal coverage with one plan instead of piecemeal.
Term or permanent?
Most business needs have an end date. A loan gets paid off, a key employee retires, a business gets sold. Term insurance fits those needs and costs far less per dollar of coverage. Permanent coverage earns its place when the need lasts a lifetime (an estate tax bill, a buy-sell between owners who plan to die owning the company) or when cash value has a job to do, as in a bonus plan. Our term vs permanent for buy-sell funding guide shows the math. Convertible term is often the middle path: buy term now and keep the right to convert later without new health questions.
How we work on business cases
We are independent brokers, so we can shop several carriers for each person. A typical business case looks like this:
- Purpose first. We confirm what the coverage is for and read the document behind it: the buy-sell agreement, the lender's commitment letter, or the employment agreement.
- Structure. Owner, beneficiary and any required paperwork (101(j) consent, collateral assignment, split-dollar agreement) get set before the application, not after.
- Underwriting plan. We tell each insured what to expect (health questions, an exam if needed, financial documents for larger amounts) and which carriers fit their health history.
- Your advisors sign off. Your CPA and attorney make the tax and legal calls. We are glad to join that conversation and supply the illustrations they need.
Owners with employees often pair this with group life for the team, and owners with larger estates continue into our estate planning guide.
Every guide in this series
Protecting the business from losing a person
Key Person Insurance: How to Value the Person You Can't Lose
Three valuation methods, what carriers approve, and how to set up the policy.
Is Key Person Insurance Tax Deductible?
Why premiums are not deductible, why the payout usually is tax-free, and the paperwork that protects it.
The 101(j) Notice and Consent Rule
The paperwork that keeps a business-owned death benefit tax-free, plus a checklist.
Key Person Disability and Overhead Expense Insurance
What each pays for, how long, and how each one is taxed.
Key Person Insurance Calculator
Three planning scenarios side by side, plus the common carrier guideline.
Buy-sell agreements
Cross-Purchase vs Entity Redemption Buy-Sell
Policy count, basis step-up, Connelly and which structure fits 2 to 5 owners.
After Connelly: Is Your Buy-Sell Policy Inflating Your Estate?
What the Supreme Court decided, the numbers from the case, and how owners are restructuring.
The Insurance LLC Buy-Sell
One policy per owner, cross-purchase results, and how transfer for value is handled.
Wait-and-See Buy-Sell Agreements
Let the owners pick the buyer at death, and how to fund that flexibility.
Why Your Buy-Sell Needs Disability Triggers
Disability buyout insurance, matching definitions, and long waiting periods.
Term vs Permanent to Fund a Buy-Sell
Exit timelines, conversion rights, cash value for retirement buyouts, and blends.
Buy-Sell Funding Calculator
Funding per owner, policy count by structure, and an illustrative Connelly check.
When an owner dies
What Happens to an LLC When a Member Dies?
Operating agreements, heirs as transferees, the 90-day rule, and funding a buyout.
My Business Partner Died. What Happens Now?
The first 90 days: ownership, the agreement, lenders, valuation and paying the family.
What Happens to My Business If I Die?
Sole owners: probate, keeping it open, personal guarantees and a plan that works.
Family Business Succession and Fair Inheritances
Leave the business to the child who runs it and equal value to the others.
Selling Your Business? What Happens to Company-Owned Policies
Stock vs asset sales, transfers to the insured, and the tax traps to avoid.
Loans, taxes and who pays
Does Your SBA Loan Require Life Insurance?
Who needs it under the current SBA rules, how much, and how the collateral assignment works.
Life Insurance for a Business Loan
Why banks ask for it, how much, and why credit life is usually the wrong answer.
Can My Business Pay for My Life Insurance?
Sole prop, LLC, partnership, S corp and C corp: what is deductible and what is taxable.
S Corp Owner Life Insurance: The 2% Rules
Wages treatment, group term limits, basis and the buy-sell transfer trap.
Self-Employed Life Insurance: How Income Is Verified
Net vs gross, two-year averages, new businesses and the documents to have ready.
Life Insurance for Owner-Operators With a Truck Loan
The truck note, occupational accident gaps, and how much term coverage covers both.
Keeping key people
Section 162 Executive Bonus Plans
Deductible bonus, employee-owned policy, and the double bonus that covers the tax.
Restricted Executive Bonus (REBA)
A 162 bonus with a vesting schedule, so the benefit rewards staying.
Split-Dollar Life Insurance in Plain English
Two tax regimes, who owns what, and when sharing a policy makes sense.
Owners in specific situations
Life Insurance for Florida Practice Owners
Practice loans, partner buyouts, overhead coverage and Florida creditor protection.
Year-End Life Insurance Checklist
Buy-sell values, consents, imputed income, trust gifts, conversions and beneficiaries.
Frequently asked questions
Is business life insurance tax deductible?
Usually not when the business is the beneficiary. Section 264 of the tax code bars a deduction for premiums on a policy where the business is directly or indirectly a beneficiary, which covers key person and most entity-owned buy-sell policies. Premiums the business pays as compensation for coverage that benefits an employee's family, such as a Section 162 bonus or group term life, are generally deductible.
Who should own a buy-sell life insurance policy?
It depends on the number of owners and the entity. Two or three owners often use a cross-purchase, where each owner owns a policy on the others. Larger groups sometimes use a separate insurance LLC or a trusteed arrangement so each owner needs only one policy. After the 2024 Connelly decision, corporation-owned (entity redemption) policies deserve a second look with your attorney.
Can one policy cover a loan and a buy-sell at the same time?
It can, but it is usually cleaner to keep them separate. A collateral assignment gives the lender first claim on the death benefit, which leaves less for the buy-sell. Two policies, or one policy sized for both with the agreement written around it, avoid a shortfall.
What does key person insurance cost?
It is priced like any other individual policy on that person: age, health, tobacco use, amount and term length. A healthy person in their 40s can often get several hundred thousand dollars of 10 or 20 year term for a modest monthly premium. The bigger question is how much coverage the carrier will approve, which depends on the person's compensation and role.
Start your life insurance request
Tell us what the coverage is for and who it would cover. For most requests we ask for each person's date of birth and sex so Erik can prepare for the call. We do not ask health or tobacco questions in this initial request. This is a request for help, not an insurance application or a promise of coverage.
- Erik reviews what you sent: the purpose, the people and the amount in mind.
- He gathers options from several carriers and works out who should own each policy.
- You talk it through on a call, with your CPA or attorney if you like. Then you decide.
Written by Erik Moran
Erik co-owns Moran Insurance Group with Amanda Moran and handles the agency's life insurance cases, from key person and buy-sell coverage to trust-owned policies. He works alongside clients' CPAs and attorneys, who make the tax and legal calls. More about Erik.
Sources
- 26 U.S. Code 101: certain death benefits (Cornell LII)
- 26 U.S. Code 264: premiums not deductible when the payer is a beneficiary (Cornell LII)
- Connelly v. United States, No. 23-146 (U.S. June 6, 2024), opinion text (Cornell LII)
- SBA SOP 50 10: Lender and Development Company Loan Programs
- IRS Publication 15-B, Employer's Tax Guide to Fringe Benefits
Moran Insurance Group is a licensed insurance agency. Our brokers are not CPAs, attorneys or tax advisors, and nothing on this page is tax, legal or investment advice. Tax figures and rules reflect our understanding as of October 2026 and can change. Coverage is subject to carrier underwriting and state availability. Confirm anything tax or legal with a licensed CPA or attorney before you act on it.