Key Person Insurance for International Business Owners

For founders and owners of international businesses, the risk has an additional cross-border dimension. The key person may live in one country, work for an operating company in another, and hold responsibilities across a wider international group. Policy ownership, insurer availability, insurable interest and tax treatment may therefore need to be considered across several jurisdictions.

Where revenue, financing, strategic relationships or operational knowledge remain concentrated around a founder or small number of senior people, their loss may affect cash flow, debt servicing and, in some cases, enterprise value.

Key person insurance can provide the business with liquidity while it responds. The appropriate structure and level of cover will reflect the financial exposure involved, as well as the legal and tax position in the relevant countries.

What Is Key Person Insurance?

Key person insurance is a business-owned policy designed to provide financial protection against the loss of a strategically important individual, such as a founder, senior executive, rainmaker or other critical employee, due to death. Depending on the market and type of cover arranged, protection may also be available for critical illness, sickness or disability.

The policy does not usually indemnify the business for its actual financial loss. Instead, it pays the agreed benefit when an insured event occurs, subject to the terms of the policy. The company can then use the proceeds to manage the disruption caused by losing the key person.

Its primary role is business continuity. It can be relevant where a company’s revenue, profitability, financing, strategic relationships, enterprise value or day-to-day operations depend heavily on a small number of people.

For an international business, the conventional structure can become more complex if the policyholder, insured person and entity exposed to the financial loss are in different countries. The business therefore needs to consider which entity should own the policy and how the arrangement will be treated in each relevant jurisdiction.

Life insurance may also be used for shareholder protection or to fund buy-sell agreements following the death of a shareholder or partner. These arrangements serve a different purpose from conventional key person insurance and can involve different policy owners, beneficiaries and tax consequences.

Similarly, life insurance may sometimes be connected with business borrowing or assigned as security to a lender. Whether this is possible, and the effect it has on the policy, will be determined by the financing arrangement, policy terms and applicable law.

Who Should Be Considered a Key Person?

A key person is someone whose loss could cause a material financial or operational problem for the business. The assessment should be based on the company’s dependence on that individual rather than their job title alone.

A founder or chief executive may be an obvious example, but a key person could also be a senior salesperson responsible for a significant share of revenue, a technical specialist with knowledge that cannot readily be replaced, or an executive who manages important investor, lender or client relationships.

Relevant signs of key-person dependence can include:

• Revenue or profitability concentrated around the individual
• Important client, investor or lender relationships that depend on them
• Specialist knowledge or authority that would be difficult to replace
• Fundraising or financing that relies on their continued involvement
• Responsibility for critical business processes
• Founder dependence that could affect succession or enterprise value

The question is not simply how senior the person is. It is what would happen financially and operationally if they were suddenly no longer available to the business.

What Is the Purpose of Key Person Insurance?

The purpose of key person insurance is to give a business financial capacity and time to respond to the loss of a business-critical individual.

Depending on the circumstances, the proceeds may be used for:

• Stabilising cash flow and satisfying payroll obligations during a transitional period
• Providing liquidity that may help reassure lenders and manage the consequences of key-person or covenant provisions in financing agreements
• Meeting client-retention costs or contractual expenses arising from operational disruption
• Funding the search, recruitment and onboarding of a replacement
• Supporting a succession or restructuring plan

In a family business, key person insurance can also support succession by providing additional liquidity and time for a structured handover. This may reduce pressure on successors to fund business obligations during the transition.

The proceeds may also provide investors and other stakeholders with additional confidence that the business has liquidity available to manage the loss of important expertise or leadership.

The policy cannot remove the underlying business risk. Its role is to provide capital when the business may otherwise face an immediate liquidity problem.

Who Is the Owner and Who Is the Beneficiary on a Key Person Life Insurance Policy?

In a conventional key person life insurance arrangement, the company is typically the policy owner and beneficiary and normally pays the premiums. The key person is the individual whose life is insured.

Whether the premiums are deductible for tax purposes is determined by the applicable jurisdiction, the purpose of the policy and the way the arrangement has been structured.

This becomes more important for international groups. The entity that owns the policy, the entity paying the premiums, the entity with the relevant economic or insurable interest and the entity receiving the proceeds are not necessarily the same company.

For example, a founder may live in one country and be employed by an operating subsidiary there, while the group’s holding company is established elsewhere. If the holding company proposes to own the policy but the operating subsidiary bears much of the economic loss, the group may need to consider the ownership, insurable-interest, insurer-availability and tax consequences in more than one jurisdiction.

How Much Key Person Insurance Do You Need?

There is no universal formula for determining the amount of key person insurance a business needs. The starting point should be the financial exposure created by the individual’s loss and the resources the business already has available to absorb it.

A practical assessment can follow this sequence:

1. Identify the dependency
2. Quantify the financial exposure
3. Assess existing liquidity and other risk controls
4. Determine the remaining exposure
5. Consider how much of that risk should be insured
6. Establish a workable policy structure.

Salary or remuneration can form part of the assessment, but it may bear little relationship to the actual economic value or risk associated with the person.

For a salesperson or rainmaker, revenue and contribution to profit may be more important. For a founder or senior executive, the analysis may instead focus on financing, strategic relationships, operational responsibilities or the effect that the person’s absence could have on enterprise value.

Depending on the key person’s position, relevant factors may include:

• Revenue or profit attributable to the individual
• The expected period of disruption
• Recruitment and training costs
• Business valuation impact if the person’s loss would materially affect enterprise value
• Debt servicing exposure, particularly where financing relies on the continued involvement of a named individual
• Client or investor relationships linked closely to the individual
• Fundraising or capital-raising dependency
• Operational continuity where critical processes rely on that person’s knowledge or authority

The appropriate amount is therefore usually a business-case assessment rather than the result of a single formula.

The assessment should also be reviewed as the business changes. Fundraising, acquisitions, additional borrowing, international expansion, succession planning or a reduction in founder dependence can all alter the financial exposure. A change in the insured person’s country of residence may also justify reviewing the existing policy structure.

What Is the Tax Treatment of Key Person Insurance?

There is no universal tax treatment for key person insurance. The result is influenced by the jurisdiction, the policy’s purpose and structure, and the relationship between the policyholder, insured person and beneficiary.

For an internationally operating business, the analysis can involve more than one country. The treatment of premiums and proceeds should therefore be established before the business assumes either will receive a particular tax treatment.

How Is Key Person Insurance Taxed in the UK?

In the UK, HM Revenue & Customs (HMRC) guidance provides that premiums may be deductible where the sole purpose of taking out the insurance is the trade purpose of meeting a loss of trading income resulting from the loss of the key person’s services, rather than covering a capital loss.

For life insurance, HMRC also specifies that the policy must be term insurance providing cover against death within the policy term, without other benefits, and that the term should not extend beyond the period of the employee’s usefulness to the company.

Policies designed to cover a capital loss or taken out for a non-trade purpose will generally not meet these conditions. HMRC gives the example of insurance taken out in respect of a major shareholder where the purpose is to protect the value of that person’s holding rather than the company’s trading income.

Whole of life and endowment policies are treated differently. HMRC states that premiums on whole life or endowment policies, or critical illness or accident policies containing an investment element so that premiums contribute towards a capital investment, are capital expenditure and are not deductible.

For a broader explanation of how the two policy structures differ, see our guide to term life insurance vs whole life insurance.

Critical illness cover should therefore not be treated as automatically non-deductible simply because it covers critical illness. The structure and purpose of the policy matter.

Where HMRC’s conditions for deducting the premiums are satisfied, sums received under the policy are treated as income of the employer’s trade.

Where the relevant conditions are not satisfied, HMRC’s general rule is that premiums are not deductible and receipts are not taxed as trading income. The taxation of a receipt is, however, a separate question of law from the deductibility of the premiums. A business should not assume that a future receipt will be non-taxable solely because tax relief was unavailable on the premiums.

How Is Key Person Insurance Taxed in the US?

For a conventional US key person arrangement in which the business is directly or indirectly the beneficiary, premiums are generally non-deductible. Section 264(a)(1) of the Internal Revenue Code disallows a deduction for premiums paid on a life insurance, endowment or annuity contract where the taxpayer is directly or indirectly a beneficiary.

The treatment of death benefits is a separate issue. Section 101(j) contains specific rules for employer-owned life insurance contracts and can restrict the amount excluded from gross income. Statutory exceptions are available where the relevant requirements are met, including notice and consent requirements.

Businesses owning relevant employer-owned life insurance contracts may also have annual reporting and record-keeping obligations under Section 6039I, with IRS Form 8925 used for the associated reporting.

For these purposes, Section 101(j) defines an insured as an individual covered by the contract who is a US citizen or resident. Internationally mobile businesses should therefore establish the individual’s status for the relevant US rules rather than relying simply on where that person lives or works at a particular time.

The UK and US examples illustrate why cross-border business owners should establish the position in each relevant jurisdiction before assuming that premiums will be deductible or policy proceeds will be tax-free.

What Should International Companies Consider Before Purchasing Key Person Insurance?

Internationally mobile founders, expatriate business owners and cross-border corporate groups need to consider more than the amount of cover. The proposed policy also needs to work with the group’s corporate structure and the location of the insured individual.

The key questions usually concern:

1. Cross-border ownership and insurable interest
2. Residency requirements and insurer availability
3. International group structures
4. The tax treatment of premiums and proceeds in the relevant countries

Cross-Border Ownership and Insurable Interest

The company taking out the policy may need to demonstrate the necessary insurable interest or otherwise satisfy the applicable legal requirements for insuring the life of the key person.

The rules vary according to the governing law and can become more complex where the policyholder, insured person and business operations are located in different jurisdictions.

The legal position may also vary according to the relationship between the company and the insured person. An executive employed directly by the policyholder presents a different structure from a founder employed by one subsidiary while the policy is owned by a holding company in another country.

The relevant rules should therefore be checked in each jurisdiction involved in the arrangement, particularly where the policyholder and insured person are based in different countries.

Residency Requirements and Insurer Availability

Insurer underwriting and distribution rules may restrict the availability of cover for people living or working outside the insurer’s home market. Requirements vary by insurer, product and jurisdiction.

This becomes relevant when a company expands into another country or transfers a key person overseas. A change of residence does not necessarily invalidate existing cover, but it should prompt a review of the policy terms, insurer requirements and any resulting tax or regulatory considerations.

Businesses also need to consider whether an insurer is authorised to provide the relevant cover in the jurisdiction concerned.

Where an insurer is not authorised or admitted in the jurisdiction where the relevant risk is located, regulatory, tax, premium-tax and claims-administration issues may arise. Local law will determine whether cross-border or non-admitted cover is permitted, so the position should be established before the policy is put in place.

Complications of International Group Structures

An international group may have a holding company in one jurisdiction, operating subsidiaries in several others and key people resident elsewhere.

In that situation, the insurance analysis should distinguish between four questions:

• Which entity owns the policy?
• Which entity pays the premiums?
• Which entity has the relevant economic or insurable interest?
• Which entity receives the proceeds?

Those answers can affect whether the proposed structure is legally workable and how premiums and policy proceeds are treated for tax purposes.

A group may also need to consider how proceeds move between companies after a claim. If, for example, a holding company receives the benefit but the economic disruption occurs in an operating subsidiary, moving the funds to the subsidiary can create separate tax, accounting, corporate-law or transfer-pricing questions depending on the jurisdictions involved.

The residence and status of the insured person may matter as well. In the US, for example, the employer-owned life insurance provisions in Section 101(j) define an insured by reference to US citizenship or residence. Internationally distributed management teams therefore require more careful analysis than a purely domestic arrangement.

Tax Treatment Across Jurisdictions

Where more than one country is involved, the tax position should be considered in the context of the policy’s ownership and the wider group structure. The treatment of premiums and proceeds in one jurisdiction does not necessarily determine the position elsewhere.

This is particularly relevant where one group company pays the premiums, another owns the policy or receives the proceeds, or the insured person is resident in a different country. The tax position should therefore be established across the jurisdictions connected with the arrangement rather than considered solely from the perspective of the policyholder’s home country.

Key Person Insurance as Part of Business Continuity and Succession Planning

Key person insurance addresses one part of the financial exposure created by dependence on an important founder, executive or employee. It does not replace wider business continuity planning.

A business may also reduce its dependence on one person by maintaining emergency liquidity, transferring important relationships and responsibilities, developing successors and strengthening internal governance.

Shareholder agreements need to be considered separately, particularly where the death of a founder or shareholder could affect ownership or control. Debt planning should also address what happens if financing documents contain key-person provisions or personal guarantees.

Insurance can then be used against the financial exposure that remains.

The required level of protection may change as the company develops. Founder dependence may fall as responsibilities move to a wider management team, or increase following an acquisition, new borrowing or expansion into another market.

Key person insurance should therefore be reviewed following material changes such as fundraising, acquisitions, new debt facilities, international expansion, succession, changes to the corporate structure or relocation of the insured person.

The appropriate combination of insurance, liquidity, succession planning, shareholder arrangements, debt planning and governance will reflect the company’s legal structure and the risks associated with its key people.