Business owners
Key person insurance for New Jersey businesses
Key person insurance is a policy the business owns on someone it can’t easily lose, so it has cash to absorb the hit if that person dies.
The review should name the financial loss you’re protecting, and the employee’s written notice and consent must be in place before the policy is issued.
Who this is for
- Founder-dependent businesses
- Companies where one person holds the key customer relationships or licenses
- Firms with a specialist (estimator, engineer, lead producer) who would take months to replace
- Businesses whose lender or investor requires key person coverage
Consent comes before the policy, not after
Under IRC §101(j), death benefits from certain employer-owned policies can lose their income-tax exclusion unless an exception applies and the notice-and-consent requirements were met. That means written notice to the employee and their written consent before the policy is issued.
Businesses that own these policies generally file IRS Form 8925 each year the coverage is owned. Filing the form does not fix a missing consent.
Being an owner doesn’t automatically take you out of these rules. Your CPA should confirm which exception applies and how the notice is worded.
Premiums usually aren’t deductible
When the business is directly or indirectly a beneficiary of the policy, the premiums generally are not deductible. Plan the cost as an after-tax expense and let your CPA confirm the treatment.
Size it to the loss, not to a salary multiple
There’s no legal rule or carrier-wide multiple for key person coverage. A defensible amount comes from what the business would actually lose: the cost to recruit and train a replacement, the profit the person drives, the disruption period, and any debt that depends on them.
Carriers will still apply their own financial underwriting to the amount requested, so the reasoning should be written down.
A lender’s policy and a key person policy may not be the same policy
If a bank requires insurance on an owner, part of the death benefit may already be committed to the loan through a collateral assignment. Counting that same money as operating protection double-counts it. Map each obligation separately.
Key person loss worksheet
Fill in each line separately; the total is a starting point for the conversation, not a coverage amount.
| Loss category | What to estimate |
|---|---|
| Recruitment | Search, hiring and signing costs for a replacement |
| Transition | Training, overlap and lost productivity while the role is filled |
| Lost contribution | Profit or revenue tied to the person during the disruption period |
| Debt exposure | Loans or lines that depend on this person (and whether a lender already has an assignment) |
What to bring to the review
- The person’s role, compensation and how long they’ve been with you
- Recent financial statements
- Revenue or customer concentration tied to the person
- Any lender or investor requirement, in writing
- Signed §101(j) notice and consent (or a plan to get it before issue)
- Prior Form 8925 filings, if the business already owns coverage
Mistakes that cost people later
- × Getting the employee’s consent after the policy is issued.
- × Assuming an owner-insured is automatically exempt from the employer-owned rules.
- × Using one death benefit to satisfy both a lender and an operating-loss need.
- × Assuming the policy’s ownership changes on its own when the employee leaves.
- × Transferring the policy to a departing employee without valuation and tax review.
Questions people ask
How much life insurance should we carry on our founder?+
Enough to cover what the business would actually lose: replacement cost, lost profit during the disruption, and debt that depends on the founder. Carriers also apply their own financial underwriting, so a written explanation of the number helps.
Can we insure a top salesperson without the benefit going to their family?+
Yes. In a key person policy the business is the owner and beneficiary. The employee must receive written notice and give written consent before the policy is issued.
Are key person premiums deductible?+
Generally no, when the business is a beneficiary of the policy. Confirm the treatment for your situation with your CPA.
What has to be signed before the policy starts?+
The §101(j) notice and consent, plus the application. Missing the consent can make the death benefit taxable to the business.
What happens to the policy when the employee leaves?+
Nothing automatic. The business still owns it and can keep, surrender, or transfer it, and each choice has tax consequences to review first.
Is the policy for the bank different from the policy protecting the business?+
It can be the same contract, but the portion assigned to the lender isn’t available to replace lost profit. Plan the two needs separately.
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Kevin Brown, licensed New Jersey insurance producer (#3003694894)
Kevin Brown Insurance Agency, South Plainfield, NJ. You work with Kevin directly on every life case. Updated November 2026.
Coverage, policy features, premiums and underwriting requirements depend on the insurer, product, applicant and state availability. Approval is not guaranteed. Illustrations are not promises of future performance. Kevin Brown Insurance Agency does not provide medical, legal or tax advice. Consult your attorney or CPA about your circumstances.