Key employee coverage is life insurance purchased by a business on the life of a critical employee, owner, or executive whose unique skills, relationships, or contributions are essential to the company's success. The business is typically both owner and beneficiary of the policy and uses the death benefit to offset lost profits, fund recruitment and training of a replacement, reassure lenders, or stabilize the company in the event of the key person's death. Key employee coverage can be term, permanent, or a combination, and may also serve as a component of broader executive benefit or succession planning strategies. Properly structured, it helps protect enterprise value and provides a financial cushion during periods of unexpected leadership loss.

In real world usage, advisors recommend key employee coverage when working with closely held businesses, professional practices, and entrepreneurial firms that rely heavily on a few individuals. They conduct key person risk assessments, estimate the financial impact of losing a key contributor, and propose coverage amounts that reflect projected revenue loss, replacement costs, and debt obligations. Applications typically require detailed financial justification and coordination with business financial statements. Policies may also be collaterally assigned to lenders or tied into buy sell agreements or nonqualified deferred compensation plans. Advisors explain premium tax treatment, potential alternative minimum tax issues for C corporations, and how proceeds will be reflected on the company's books. By designing well documented key employee coverage, producers help businesses retain confidence from creditors, investors, and employees while safeguarding continuity if the unexpected occurs.