CARD T091
Key Person Insurance
Insurance a business obtains to help offset loss caused by a key worker’s death or disability. The business typically receives the benefit.
How it works
Key person coverage protects a business from the financial effects of losing an important worker. The business typically owns the policy, pays premiums, and receives proceeds. The person is the insured. Legitimate interest and consent rules matter; employer-owned life also has federal notice-and-consent requirements relevant to tax treatment. The benefit does not automatically go to the worker’s family. [30] [29]
A firm insures its principal designer and receives proceeds after a covered death to help with replacement costs and lost revenue.
Key person protects the business’s loss. A buy-sell arrangement funds the purchase of an ownership interest.
CARD T092
Buy-Sell Agreement
An agreement for buying an owner’s business interest after death or another specified event. In a cross-purchase agreement, the other owners buy the interest; in an entity-purchase agreement, the business buys it. Life insurance can fund either arrangement.
How it works
A buy-sell agreement states how an ownership interest will be purchased after specified events. In cross-purchase funding, the other owners typically own coverage on each other and use proceeds to buy the deceased owner’s interest. In entity-purchase or stock-redemption funding, the business owns the coverage and buys the interest. The legal agreement and insurance funding are separate. [27]
Two partners each own life insurance on the other to fund a purchase from the deceased partner’s estate: cross-purchase. If the company owns the insurance and redeems the interest, it is entity-purchase.
Identify who buys the business interest. Insurance supplies money; the agreement supplies the buyout terms.
CARD T093
Split-Dollar Arrangement
An arrangement in which two parties, often an employer and employee, share the costs and benefits of a life policy. Their agreement sets ownership and each party’s rights. Split-dollar is an arrangement, not a policy type, and does not require a 50/50 split.
How it works
Split-dollar is a contractual arrangement allocating life-policy costs and benefits between parties, often an employer and employee. Ownership, premium obligations, death-benefit shares, and repayment rights follow the agreement. Different structures have different tax consequences. It is not a distinct policy type and does not require equal shares. [28]
An agreement gives an employer a defined recovery interest while the employee’s beneficiaries receive the remaining death benefit. The amounts follow the agreement rather than a mandatory 50/50 rule.
Split-dollar describes who shares what—not a special 50% policy benefit or automatically tax-free compensation.
APPLY THE TERMS
Practice questions
Select an answer, then check it to see why each option is right or wrong.
T091 · Key Person Insurance
0 of 3 answered
T092 · Buy-Sell Agreement
0 of 3 answered
T093 · Split-Dollar Arrangement
0 of 3 answered
Sources & further reading
Original explanations and practice scenarios informed by the following regulatory, legal, and product resources. State examples are not presented as nationwide deadlines or requirements.