Life · Chapter 10 · Key Person & COLI
Key Person (Key Employee) Insurance
Definition
Protects a business against financial loss from the death or disability of a vital employee (special managerial/technical skill). The business is applicant, owner, premium payor, AND beneficiary; the key employee is only the insured (third-party ownership). Four purposes: business indemnification, reserve fund (cash value on the balance sheet), business credit, and favorable tax treatment.
In plain English
The company insures its star player so it can afford to survive losing them — recruit, hire, and train a replacement without going under.
Exam tip
Premiums NOT deductible (§264(a)(1)); death proceeds NOT taxable to the business — provided the §101(j) notice-and-consent was obtained before issue; proceeds NOT in the employee's estate (no ownership interest). ⚠️ Consent isn't just an insurable-interest formality — without it the proceeds above premiums become taxable income to the employer. The employee's family gets nothing from this policy.
Easy to confuse with
These are what this term gets tested against — if you can't tell them apart cold, drill the contrast.
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