Key Man Insurance Vs Life Insurance

Key man insurance and life insurance serve different purposes and have distinct characteristics. Here’s a comparison between the two:


Key Man Insurance:

  1. Purpose: Key man insurance is specifically designed to protect a business from the financial impact of losing a key employee or leader. It provides a financial safety net to help the business recover from the loss of a critical individual.

  2. Ownership: The business owns the key man insurance policy, pays the premiums, and is the beneficiary. The payout is intended to benefit the business by providing funds to cover expenses, replace the key person, or address other financial challenges.

  3. Coverage Amount: The coverage amount is determined based on the financial impact the loss of the key person would have on the business. It is typically designed to provide financial stability during a transition period.

  4. Tax Treatment: Premiums paid for key man insurance are not typically tax-deductible, and the insurance proceeds are generally subject to taxation as ordinary income when received by the business. You can read more about the taxation of key man insurance here.

  5. Focus: The focus of key man insurance is on the business’s financial well-being and continuity in the event of a key person’s death or disability.


Life Insurance:

  1. Purpose: Life insurance provides financial protection to individuals and their families. It pays out a death benefit to the beneficiary (usually family members) upon the insured person’s death, providing financial support and security.

  2. Ownership: The individual being insured owns the life insurance policy, pays the premiums, and designates the beneficiary (e.g., spouse or children). The policy is typically intended to provide personal financial security.

  3. Coverage Amount: The coverage amount is determined by the insured individual based on their personal financial needs and goals, such as providing for family, paying off debts, or leaving an inheritance.

  4. Tax Treatment: In many jurisdictions, the premiums paid for personal life insurance are not tax-deductible, but the death benefit is often received tax-free by the beneficiary.

  5. Focus: Life insurance primarily focuses on providing financial security and protection for individuals and their loved ones in case of the insured person’s death.

In summary, key man insurance is a business-focused insurance policy that aims to protect a company from the loss of a key employee, while life insurance is a personal insurance policy designed to provide financial security and support to individuals and their families. The key distinction lies in the ownership, purpose, and focus of each type of insurance. Businesses may choose to have both key man insurance to protect their operations and life insurance for their employees or owners to provide personal protection.