Key Person Insurance
Key Person Insurance Requirements: Notice, Consent, Face Amount and Reporting
Published October 8, 2026 · Updated October 9, 2026
Technical summary / key takeaways
- Under section 101(j)(4), notice and consent are given "before the issuance of the contract," not afterward.
- The employee's written consent covers both being insured and the fact "that such coverage may continue after the insured terminates employment."
- The written notice states "the maximum face amount for which the employee could be insured at the time the contract was issued."
- A section 101(j)(2) exception lifts the cap on the exclusion only when the notice and consent requirements are also met. An exception alone does not lift it, and notice and consent alone do not either.
- Section 6039I requires a return for each year an applicable policyholder owns one or more employer-owned contracts.
- A failed requirement does not erase the exclusion. Section 101(j)(1) limits it to "the sum of the premiums and other amounts paid by the policyholder for the contract."
Technical Summary: What Section 101(j) Requires for a Key Person Policy
A business that owns and is the beneficiary of a policy on an employee is generally subject to 26 U.S.C. § 101(j). Before issue, the employee gets written notice of the plan to insure and the maximum face amount, gives written consent covering coverage after employment ends, and is told in writing the business will be a beneficiary. The business also files annual reports. Meeting the notice and consent steps is a condition for the section 101(j)(2) exceptions, and the cap on the death-benefit exclusion is lifted for an amount only when one of those exceptions also applies.
The readers who ask this are usually owners, CFOs and finance leads of closely held companies. They are funding a specific business risk: the loss of the officer or employee whose work drives revenue, credit or continuity. Business Life Insurance treats the policy as the funding mechanism for that risk. Section 101(j) decides how much of the death benefit the business may exclude from income. Section 6039I and Form 8925 then add an annual reporting duty. Notice 2009-48 answers questions about how the IRS reads these rules.
Definition: What Makes a Policy an Employer-Owned Life Insurance Contract
The checklist applies only to an "employer-owned life insurance contract." Section 101(j)(3)(A) defines this as a contract that "is owned by a person engaged in a trade or business and under which such person (or a related person described in subparagraph (B)(ii)) is directly or indirectly a beneficiary under the contract." It also requires that the contract "covers the life of an insured who is an employee with respect to the trade or business of the applicable policyholder on the date the contract is issued." The "applicable policyholder" is the business that owns the contract, plus related persons described in section 101(j)(3)(B)(ii).
Section 101(j)(5)(A) states that "employee" includes an officer, director and highly compensated employee. Notice 2009-48 A-5 restates that section 101(j)(5)(A) provides this. A business-owned key person insurance policy on an officer, with the business as beneficiary, therefore typically meets the definition.
Notice 2009-48 addresses contracts that are and are not employer-owned contracts:
- A-1: A contract "owned by the owner of an entity engaged in a trade or business (such as for purposes of financing the purchase of an equity interest of another owner)" is not an employer-owned contract.
- A-3: Ownership "by a partnership or sole proprietorship does not prevent the contract from being treated as" one. However, a contract "owned by a sole proprietor on his or her own life" is not one.
Applicable Rules: Section 101(a)(1), Section 101(j), Section 6039I and Notice 2009-48
The starting point is the general exclusion. Section 101(a)(1) provides that "gross income does not include amounts received ... under a life insurance contract, if such amounts are paid by reason of the death of the insured." That rule is subject to several limits, including transfer for value under section 101(a)(2) and section 101(j).
For an employer-owned contract, section 101(j)(1) limits the exclusion to the premiums and other amounts the policyholder paid. Section 101(j)(2) removes that limit only for a contract "with respect to which the notice and consent requirements of paragraph (4) are met," and only for one of these amounts:
- Insured-status exception, section 101(j)(2)(A). The insured was an employee "at any time during the 12-month period before the insured's death." Alternatively, at the time the contract was issued, the insured was a director, a highly compensated employee, or a highly compensated individual, with "35 percent" substituted for "25 percent" in that individual definition.
- Heirs exception, section 101(j)(2)(B). The amount is paid to a member of the insured's family (within the meaning of section 267(c)(4)), to a designated beneficiary under the contract other than the applicable policyholder, to a trust for any of them, or to the insured's estate. The exception also covers an amount used to buy an equity interest in the policyholder from any of those persons.
Section 6039I adds the annual return. Notice 2009-48 gives the IRS's answers on definitions and procedure.
Requirements: The Four-Part Notice-and-Consent Checklist
Section 101(j)(4) states the checklist in one sentence. The requirements are met "if, before the issuance of the contract, the employee":
- Notice of intent. The employee "is notified in writing that the applicable policyholder intends to insure the employee's life."
- Maximum face amount. The same notice states "the maximum face amount for which the employee could be insured at the time the contract was issued." The Form 8925 instructions add that the notice discloses the face amount "either in dollars or as a multiple of salary," that the policyholder "reasonably expects to purchase" during the employee's tenure. They also state that "additional notice and consent are required" if the total face amount exceeds the amount the employee consented to.
- Written consent, including after employment. The employee "provides written consent to being insured under the contract and that such coverage may continue after the insured terminates employment."
- Beneficiary notice. The employee "is informed in writing that an applicable policyholder will be a beneficiary of any proceeds payable upon the death of the employee."
Timing also matters. The Form 8925 instructions state that consent "is not valid unless the related employer-owned life insurance contract is issued ... within a year after the consent was executed, or before the employee terminates employment," whichever is earlier. The instructions refer readers to Q&A-9 of Notice 2009-48 for more information.
Under Notice 2009-48 A-7, "actual knowledge alone" cannot replace notice and consent that are "written," even for a wholly owned corporation and its employee-owner.
How the Rules Work: From Notice to Death Benefit
In sequence, the rules run from the application to a claim.
Before issue. The business prepares the written notice: its intent to insure, the maximum face amount, and its status as beneficiary. The employee signs a written consent that includes consent to coverage continuing after employment ends. Many businesses call this document a key man insurance consent form.
Issue. The contract is issued within the window the Form 8925 instructions describe: within a year after consent, or before the employee leaves, whichever comes first.
Each year. The business, as applicable policyholder, files the return section 6039I requires and keeps the records section 6039I(b) calls for.
At death. The business is the owner, the premium payer and the beneficiary. It receives the proceeds and may use them to replace lost revenue, recruit a successor or meet obligations. If a section 101(j)(2) exception applies and the notice and consent requirements were met, the section 101(j)(1) cap does not apply. If either condition fails, the exclusion is limited to the premiums and other amounts paid.
Two other rules sit alongside this sequence. Section 101(a)(2) separately limits the exclusion after a "transfer for a valuable consideration" of a policy. Section 264(a)(1) provides that no deduction is allowed for "premiums on any life insurance policy ... if the taxpayer is directly or indirectly a beneficiary." Business Life Insurance covers that second rule on its page on key person premium deductibility.
Who This Is For: Businesses That Insure Key Employees
The checklist matters to any business that faces the financial loss of one person and funds that risk with a policy it owns and is paid from. Typical readers include:
- Closely held C and S corporations insuring an officer, director or highly compensated employee.
- Partnerships that insure an employee. Notice 2009-48 A-3 states that partnership ownership does not prevent a contract from being employer-owned.
- Professional practices whose revenue depends on one producer or manager. The page on life insurance for law firms covers one such setting.
- Finance leads who maintain existing coverage and handle annual reporting.
Owners in a different position include those holding a contract to finance buying another owner's equity interest: Notice 2009-48 A-1 states that a contract "owned by the owner of an entity engaged in a trade or business" for that purpose is not an employer-owned contract. The page on life insurance for business partners covers that structure.
State rules on insuring employees, including insurable interest and consent, vary by state and are separate from section 101(j).
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When It Applies: Contracts Subject to Section 101(j)
The rule is triggered by three facts, all drawn from section 101(j)(3)(A):
- The owner is a person engaged in a trade or business.
- That owner, or a related person, is directly or indirectly a beneficiary.
- The insured is an employee on the date the contract is issued.
The definition turns on these facts, not on product type. It refers to "a life insurance contract" without limiting it to term or permanent coverage. Section 101(j)(5)(B) further limits "insured" to an individual "who is a United States citizen or resident." Under section 101(j)(3)(B)(ii), related persons under section 267(b) or 707(b)(1), and businesses under common control, are also treated as applicable policyholders.
Effective dates raise their own questions. Section 6039I reaches contracts "issued after the date of the enactment of this section." Employer-owned life insurance notice and consent under section 101(j), and Form 8925 reporting, need individual review of the contracts involved by a qualified tax professional.
When It May Not Apply: Contracts Outside the Definition
Several common arrangements fall outside the definition:
- Owner-held buyout policies. Under Notice 2009-48 A-1, a contract owned by an entity's owner to finance buying another owner's interest is not an employer-owned contract.
- Plan-owned contracts. Notice 2009-48 A-1 also excludes contracts owned "by a qualified plan or VEBA that is sponsored by an entity engaged in a trade or business."
- A sole proprietor's own life. Notice 2009-48 A-3 states that this contract "is not ... an employer-owned life insurance contract."
- No business ownership. A contract not "owned by a person engaged in a trade or business" falls outside section 101(j)(3)(A).
Other rules can still apply when section 101(j) does not. A policy that changes hands for value may be limited by section 101(a)(2). Section 101(a)(2)(B) excepts transfers "to the insured, to a partner of the insured, to a partnership in which the insured is a partner, or to a corporation in which the insured is a shareholder or officer." Section 264(a)(1) still bars a deduction for premiums wherever the taxpayer is directly or indirectly a beneficiary under the policy. Transfers of policies between owners need individual review.
Compliance Considerations: Maintaining the Exclusion After Issue
Notice and consent happen once, before issue. Reporting continues every year. Section 6039I(a) requires every applicable policyholder owning one or more employer-owned contracts to file a return "showing for each year such contracts are owned":
- the number of employees at the end of the year;
- the number of those employees insured under such contracts;
- the total amount of insurance in force;
- the policyholder's name, address, taxpayer identification number and type of business; and
- that the policyholder "has a valid consent for each insured employee," or the number of insured employees for whom consent was not obtained.
A single key person policy is enough to trigger the obligation, since the statute says "1 or more." Section 6039I(b) also requires the policyholder to keep the records needed to show that section 6039I and section 101(j) are met. The IRS form for this reporting is Form 8925, which cross-references both sections. Filing time and manner follow the Form 8925 instructions.
Common Errors: What Undermines Notice and Consent
Most failures come from timing, missing language or reliance on the wrong rule:
- Consent after issue. Section 101(j)(4) looks only to notice and consent given "before the issuance of the contract." Notice 2009-48 A-13 states that section 101(j) has no correction provision. It describes limited IRS relief only where three conditions are all met: a good faith effort, an inadvertent failure, and correction no later than the tax return due date for the year of issue. Under A-13, a failure "cannot be corrected after the insured employee has died."
- No post-employment language. The statute's consent includes "that such coverage may continue after the insured terminates employment."
- No maximum face amount. A general statement of intent omits a required element.
- Exceeding the consented amount. Under the Form 8925 instructions, adding coverage above that amount requires additional notice and consent.
- Issue outside the window. Consent is not valid unless the contract is issued within a year, or before the employee leaves, whichever is earlier.
- Relying on an exception alone. Section 101(j)(2) works only together with section 101(j)(4).
- Skipping reporting. Section 6039I requires a return for each year the contract is owned, whether or not a claim is paid.
- Assuming informal knowledge suffices. Notice 2009-48 A-7 rejects this. Written notice and consent may be given electronically under Notice 2009-48 A-11 "so long as the system for electronic notification and consent includes the elements set forth in § 101(j)(4)," and the system must also meet four further requirements that answer lists.
Example (Hypothetical): One Key Person Policy
This example is hypothetical and for illustration only. It does not represent any reader's result.
Assumptions. A closely held C corporation has 10 employees. It plans to insure its chief operating officer (COO), who is an officer and a highly compensated employee, under a $1,000,000 contract. The corporation will own the contract, pay the premiums and be the sole beneficiary. Premiums paid before death total $50,000. No transfer for value occurs.
- Notice. Before issue, the corporation gives the COO written notice of three things: its intent to insure the COO, a maximum face amount of $1,000,000, and that it will be the beneficiary.
- Consent. The COO signs a written consent that includes consent to coverage continuing after employment ends.
- Issue. The contract is issued within a year after the consent and while the COO is still employed.
- Reporting. Each year the corporation reports 10 employees, 1 insured, $1,000,000 in force, and valid consent.
- Death. The COO was a highly compensated employee at issue, which falls within the section 101(j)(2)(A)(ii) exception, and notice and consent were met. The section 101(j)(1) cap therefore would not apply, and the section 101(a)(1) exclusion would govern the $1,000,000.
Alternative. Assume consent was signed only after issue, so the section 101(j)(4) requirement of consent "before the issuance of the contract" was not met. The cap applies:
- Amount excludable: $50,000 in premiums paid
- Amount included in gross income: $1,000,000 − $50,000 = $950,000
Professional Coordination: Confirming the Requirements Are Met
Each party has a distinct role. The employer's tax professional or counsel typically drafts or reviews the notice and consent documents before the application is submitted. Many insurers also use their own consent forms with the application. Those forms, and any state consent or insurable-interest rules, are separate from section 101(j)(4). Insurer forms and procedures vary from insurer to insurer and are confirmed with the insurer involved.
Form 8925 is the policyholder's filing, and a tax professional typically prepares it. A lender that takes a collateral assignment, meaning a pledge of policy proceeds as loan security, adds another party whose interest is documented separately. The page on business succession life insurance places these policies within a wider ownership transition.
We're Here for You
We're your trusted California business life insurance advisor. Call us 7 days a week, or send us a message, to have a real conversation about what your business needs.
Frequently Asked Questions
What written notice must a business give an employee before issuing a key person policy?
Section 101(j)(4) calls for written notice before issue on three points. The notice states that the business intends to insure the employee's life and the maximum face amount for which the employee could be insured. It also informs the employee in writing that the business will be a beneficiary of the proceeds.
Does consent to a key person policy need to cover coverage after the employee leaves the company?
Yes. Under section 101(j)(4)(B), the written consent covers being insured "and that such coverage may continue after the insured terminates employment." A consent that omits the post-employment element does not track the statute's wording.
Who falls outside section 101(j) when a business insures a key person?
A person who is not an employee on the date of issue falls outside the section 101(j)(3) definition. Section 101(j)(5)(A) includes officers, directors and highly compensated employees as employees. Notice 2009-48 A-3 places a sole proprietor's policy on his or her own life outside the definition.
What is Form 8925 and when does a business file it?
Form 8925 is the IRS form tied to section 6039I reporting on employer-owned life insurance. Section 6039I requires a return for each year an applicable policyholder owns one or more employer-owned contracts. The return reports employee counts, the insurance in force and consent status. The form's instructions say to attach it "to the policyholder's income tax return for each tax year during which the policyholder has employer-owned life insurance contract(s) in force."
How long after an employee gives consent is the key person policy issued?
According to the Form 8925 instructions, consent is not valid unless the contract is issued within a year after the consent was executed, or before the employee leaves employment, whichever is earlier. The instructions point to Q&A-9 of Notice 2009-48.
What happens to the death benefit if the notice-and-consent requirements are not met?
Section 101(j)(1) limits the exclusion to "the sum of the premiums and other amounts paid by the policyholder for the contract." Proceeds above that sum are included in gross income. The exclusion is limited, not eliminated.
Educational information only. Not legal, tax, investment or insurance advice. Product availability and outcomes depend on individual circumstances.