February 1, 2006
Key person coverage is a kind of life insurance on critical employees where the proceeds are paid to the corporation. Its purpose is to indemnify the employer against a potential loss of income that may result from the untimely death of a key employee. The tax-free proceeds from this type of policy (also known as corporate-owned life insurance) can be used to compensate for lost business, hire a replacement or any number of other business-related transactions. In addition, many investors will look for the added protection key person life insurance provides. It should be noted that there are statutes and regulations, particularly in New York, that limit such insurance to people who are truly irreplaceable to a business operation (and to prevent insuring or trading on the lives of lower-level employees). Common requirements are that the key person be one of the five highest paid officers, a 5% owner or an employee who is among the highest paid 35% of all employees (see New York Insurance Department. Regulation No. 180, NYCRR 48).