Key Employee Life Insurance: Which Common Statement Is Incorrect?

Direct Answer

Among the typical statements about key employee life insurance, the incorrect one is: "Key employee life insurance is a personal policy that the employee can keep after leaving the company." Unlike personal life insurance, a key employee (or key person) policy is owned by the employer, not the employee, and it terminates or is transferred when the employee departs.

What Is Key Employee (Key Person) Life Insurance?

Key employee life insurance, also called key person insurance, is a corporate-owned life insurance (COLI) policy that protects a business against the financial loss that would result from the death of a vital employee. The employer pays the premiums, names the business as the beneficiary, and can use the death benefit to cover expenses such as recruitment, debt repayment, or revenue gaps.

Why Companies Purchase These Policies

Businesses buy key employee policies for several strategic reasons:

• Revenue protection: Replacing a top salesperson or executive could cost a significant portion of annual revenue.
• Debt coverage: Some loans require the business to have a policy on a key individual as collateral.
• Continuity planning: The benefit can fund a buy‑sell agreement or support a smooth transition.

Key Features and How They Differ From Personal Life Insurance

Understanding the distinctions helps avoid the common misconception noted above.

Common Correct Statements About Key Employee Life Insurance

Below are statements that are accurate and widely accepted:

• The employer pays the premiums and retains ownership of the policy.
• The death benefit is tax‑free to the business under most circumstances.
• Policies can be term or permanent, depending on the company's needs.
• They are often used to fund buy‑sell agreements between owners.

Potential Misunderstandings to Avoid

Besides the false statement highlighted at the start, other misconceptions include:

"The employee can name their own beneficiary."

Because the employer is the policy owner, only the company can designate the beneficiary.

"The policy is a tax‑deductible expense for the employee."

Premiums are generally a non‑deductible business expense; the employee receives no tax benefit.

What Happens When a Key Employee Leaves

If the employee resigns, is terminated, or otherwise departs, the employer typically has three options:

• Terminate the policy: The coverage ends, and any cash value (if it's a permanent policy) may be surrendered.
• Transfer ownership: The employer can assign the policy to another key individual.
• Convert to personal coverage: Some policies allow conversion, but this requires the employee to take over premium payments and become the new owner.

Practical Steps for Businesses Considering a Key Employee Policy

Follow this checklist to ensure the policy aligns with corporate goals:

• Identify the employee(s) whose loss would materially affect cash flow.
• Quantify the financial impact (revenue loss, recruitment costs, debt obligations).
• Choose term length that matches the expected tenure or project horizon.
• Work with an insurance professional familiar with COLI regulations.
• Document the policy in corporate governance records.

Conclusion

The only incorrect statement among common assertions about key employee life insurance is that the policy is personal and portable for the employee. All other typical claims—employer ownership, business‑focused beneficiary, and use as a financial safeguard—are accurate. Understanding these facts helps businesses use key employee insurance effectively without falling into common myths.