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A Key Employee Life Insurance Checklist is a structured form that guides a business through the process of identifying critical personnel, determining appropriate coverage amounts, selecting policy types, and verifying that all compliance and documentation requirements are met before and after a key person life insurance policy is placed. It ensures that every material consideration β from employee consent under IRS rules to beneficiary designation and premium tracking β is addressed in a single, auditable record rather than scattered across emails and filing cabinets.
Without a systematic checklist, key person insurance decisions are made inconsistently β one founder is covered at a policy amount set years ago, another critical hire was never evaluated, and the consent documentation required under IRC Section 101(j) was never collected. The consequence of that gap is not theoretical: a death benefit that should have been tax-free becomes taxable income, a buy-sell agreement cannot be funded because the policy lapsed after an untracked premium due date, or a lender discovers missing coverage during a loan renewal. This checklist closes those gaps by providing a repeatable process for every key person evaluation β ensuring the right coverage is in place, properly documented, and reviewed on a schedule before the business needs it.
| If your situation is⦠| Use this template |
|---|---|
| Evaluating coverage needs before applying for a new policy | Key Employee Life Insurance Checklist |
| Documenting a buy-sell agreement funded by life insurance | Buy-Sell Agreement |
| Tracking all company insurance policies in one place | Business Insurance Checklist |
| Reviewing business continuity risks beyond key person loss | Business Continuity Plan |
| Onboarding a new executive whose departure would impact revenue | Executive Employment Agreement |
| Assessing all financial risks during an annual business review | Annual Business Review Template |
| Satisfying an SBA lender's key man insurance requirement at loan closing | SBA Loan Checklist |
Why it matters: Without proper written notice and consent for employer-owned life insurance, the death benefit may be fully taxable as ordinary income to the business β eliminating most of the financial protection.
Fix: Obtain signed consent from the covered employee before the policy is issued and retain the documentation in a permanent file alongside the checklist.
Why it matters: If a co-owner or family member is accidentally listed as beneficiary, the death benefit bypasses the business entirely, leaving the company without the funds needed to cover losses or execute a buy-sell agreement.
Fix: Always list the legal business entity as both owner and primary beneficiary; review the policy declarations page immediately after issuance to confirm.
Why it matters: A policy set at 5Γ salary from three years ago may now represent only 2Γ salary β leaving a significant gap between the death benefit and the actual financial loss the business would face.
Fix: Tie annual coverage reviews to compensation reviews or fiscal year-end planning so the coverage amount stays aligned with the employee's current value to the business.
Why it matters: If the person who manages the policy leaves or becomes incapacitated, the company may be unable to locate the policy, miss a premium payment, or fail to file a timely claim.
Fix: Use a centralized checklist like this template, stored in a shared drive with access granted to at least two authorized personnel, to ensure continuity regardless of staff changes.
List every employee or owner whose sudden loss would cause measurable financial harm β lost revenue, client attrition, or an inability to deliver core services. Typical candidates include founders, top salespeople, lead engineers, and employees with unique client relationships.
π‘ A practical threshold: if replacing this person would take more than 3 months and cost more than 1Γ their annual salary, they likely qualify.
Document the specific dollar impact β annual revenue they generate or influence, cost to recruit and train a replacement, or outstanding loan or contract obligations tied to their performance.
π‘ Pull numbers from your CRM or financial reports to make the assessment concrete and defensible for insurers or investors.
Choose a calculation method β salary multiple (5β10Γ), revenue contribution (1β2 years' worth), or replacement cost β and record both the method and the resulting figure in the coverage field.
π‘ If the business has an SBA loan, confirm the required coverage amount directly with the lender; SBA guidelines often specify a minimum death benefit equal to the outstanding loan balance.
Decide between term (lower cost, finite period) and permanent (builds cash value, lifelong coverage) based on the business objective. Get at least two carrier quotes before completing the policy details field.
π‘ Term policies work well when coverage is tied to a specific loan or time-limited risk; permanent policies double as a tax-advantaged executive retention tool.
Once the policy is issued, record the carrier name, policy number, issue date, and premium schedule in the checklist. File a copy of the policy alongside the completed checklist.
π‘ Store the checklist and policy documents in a shared secure folder accessible to at least two people β sole custody creates its own key-person risk.
Obtain and file the employee's written consent to the policy before the policy is issued. Record the date consent was given and confirm it matches the insurer's records.
π‘ Use a separate consent form with the employee's signature; a checkbox on the checklist alone is not a substitute for a standalone signed document.
Set a calendar reminder for the annual review β at minimum, verify that coverage amounts still reflect the employee's current role, salary, and business contribution.
π‘ Tie reviews to your fiscal year-end so coverage assessment happens alongside your financial planning cycle.
Key employee life insurance β also called key man or key person insurance β is a life insurance policy owned by a business on an employee whose death would cause significant financial harm to the company. The business pays the premiums and receives the death benefit, which is used to cover lost revenue, recruit a replacement, repay loans, or fund a buy-sell agreement. It is one of the most common risk management tools for small and mid-size businesses.
Any employee whose sudden absence would cause measurable financial damage qualifies β founders, top revenue producers, lead technical personnel, or anyone with exclusive client relationships. A practical test: if replacing this person would take more than three months and cost more than one year's salary in lost revenue or recruitment costs, they are likely a key person. Most businesses cover two to five employees at any given time.
Common methods include a salary multiple of 5β10Γ, one to two years of the revenue the employee directly generates, or an estimate of the total replacement cost including recruitment, training, and lost client revenue. SBA lenders typically require coverage equal to the outstanding loan balance. There is no universal formula β the right amount depends on the specific financial exposure the business faces.
Generally, death benefits received by a business are income tax-free under IRC Section 101(a). However, if the employer-owned life insurance (EOLI) requirements of IRC Section 101(j) are not met β specifically written notice to and consent from the covered employee β the benefit above the employer's premium investment can become taxable. Consult a tax advisor to confirm compliance before the policy is issued.
A term policy provides coverage for a defined period (typically 10β20 years) at a lower premium with no cash value. It suits time-limited risks like an outstanding business loan or a growth phase where a specific person is critical. A permanent policy (whole or universal life) provides lifelong coverage and builds cash value the business can borrow against β useful as both insurance and a long-term executive benefit or business reserve.
Yes. For employer-owned life insurance on non-owner employees, IRC Section 101(j) requires that the employee receive written notice before the policy is issued and provide written consent. The notice must disclose the maximum face amount and that the employer will be the beneficiary. Failing to obtain consent does not void the policy but can make the death benefit taxable to the business.
Yes β this is one of the most common uses. When a co-owner is the key person, the business or surviving owners can use the death benefit to purchase the deceased owner's share from their estate, preventing unwanted ownership transfers and ensuring business continuity. The buy-sell agreement specifies the terms; the life insurance policy provides the liquidity to execute them.
At minimum annually, aligned with your fiscal year-end or compensation review cycle. Coverage should also be reassessed after a significant salary increase, a new business loan, a material change in the key employee's role, or a major shift in business revenue. This checklist includes a review sign-off field specifically to ensure that assessment happens on a defined schedule rather than reactively.
A business continuity plan addresses the full range of operational disruptions β natural disasters, cyberattacks, supply chain failures β and documents recovery procedures for each. A key employee life insurance checklist focuses narrowly on the financial risk of losing a specific person and ensures the right insurance coverage is in place before that event occurs. The two documents complement each other: the continuity plan explains what to do; the checklist ensures the funding to do it is available.
An employee benefits checklist documents the benefits offered to all employees β health, dental, retirement, PTO. Key employee life insurance is a company-owned policy that protects the business, not the employee. The two documents serve different owners: one is an HR record, the other is a risk management and financial planning tool for the business itself.
An executive employment agreement defines the terms of employment β compensation, duties, non-compete, severance. It does not address what happens to the business financially if the executive dies. The key employee insurance checklist fills that gap by ensuring a death benefit is in place before the executive starts. Both documents should exist for any high-value hire.
A buy-sell agreement is a legally binding contract that governs the transfer of a deceased or departing owner's equity. Key employee life insurance is the funding mechanism that makes the buy-sell executable β the insurance proceeds provide the liquidity to purchase the deceased owner's share. The checklist ensures the policy is properly structured and documented before it is needed.
Law firms, accounting practices, and consulting firms routinely insure founding partners whose client relationships constitute the majority of firm revenue.
Early-stage tech companies often insure a lead engineer or CTO whose proprietary knowledge underpins the core product, particularly when the business has raised venture capital or carried SBA debt.
General contractors insure project managers or estimators who hold key subcontractor relationships and whose absence mid-project could trigger performance bond claims or client penalties.
Manufacturers cover plant managers or lead engineers whose operational knowledge is embedded in production processes that would be difficult to document or transfer quickly.
| Path | Best for | Cost | Time |
|---|---|---|---|
| Use the template | Small businesses and founders conducting an initial key person coverage assessment or annual policy review | Free | 30β60 minutes per covered employee |
| Template + professional review | Businesses with SBA loan requirements, multiple covered employees, or policies tied to a buy-sell agreement | $200β$500 (insurance broker or financial advisor review) | 1β3 days |
| Custom drafted | Enterprises with complex ownership structures, multi-jurisdiction coverage, or executive benefit plans requiring legal and tax review | $1,000β$3,000+ (attorney and tax advisor involvement) | 1β2 weeks |
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