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Key Person Life Insurance Calculator

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Estimate how much key person life insurance your business needs, using either the income multiple or replacement cost method.

Key Person Life Insurance Calculator

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Suggested coverage amount
$1,050,000
Both methods are industry-standard estimation approaches, not exact formulas - actual coverage decisions should factor in the business's specific situation, often with input from an insurance advisor and accountant.

The two methods

Income multiple method: Coverage = Annual compensation x Multiple (commonly 5-10x) Replacement cost method: Coverage = Recruiting cost + Training/ramp-up cost + Estimated lost revenue - Existing coverage
Example

Income multiple: a key person earning $150,000/year at a 7x multiple suggests $1,050,000 in coverage. Replacement cost: $50,000 recruiting + $75,000 training + $400,000 in estimated lost revenue during the transition, minus $100,000 in existing coverage, suggests $425,000.

Step-by-step guide

  1. Identify who genuinely qualifies as a "key person" - typically someone whose loss would materially disrupt revenue, client relationships, financing, or operations, not just any valued employee.
  2. Choose a calculation method - income multiple is quicker and works well for a rough estimate; replacement cost is more detailed and often more defensible if you need to justify the coverage amount to lenders or investors.
  3. Review the result with an insurance advisor - actual underwriting also depends on the specific insurer's guidelines and the business's financials.

Why lenders sometimes require key person insurance as a loan condition

Banks and investors extending credit to a small or closely-held business are often making a bet not just on the company, but on the specific people running it - particularly founders, top salespeople, or technical experts whose knowledge and relationships are difficult to replace quickly. It's common for commercial lenders to require key person life insurance (with the lender named as beneficiary, up to the loan amount) as a condition of financing, specifically to protect their own position if that critical person dies unexpectedly. This is a different purpose from key person coverage the business buys for itself, which typically funds the company's own recovery costs rather than directly repaying a specific loan.

Common mistakes

Confusing key person insurance with buy-sell agreement funding - key person coverage helps the business survive the operational loss; buy-sell funding (a related but separate concept) helps buy out a deceased owner's equity stake from their heirs.
Underestimating lost revenue during the replacement period - the disruption cost is often far larger than just the salary being replaced, especially for a founder or top salesperson with irreplaceable client relationships.

Frequently asked questions

Who owns the policy and receives the payout - the business or the employee's family?

The business - it's both the owner and beneficiary of a key person policy, and the payout goes to the company to help cover transition costs, not to the deceased employee's family (that would typically be a separate, personal life insurance policy).

Is key person insurance tax-deductible for the business?

Generally no - premiums aren't deductible as a business expense under most circumstances, since the business is also the policy's beneficiary. However, the death benefit received is typically tax-free income to the business. Consult a tax professional for specifics.

Does the key person need to consent to being insured?

Yes - the insured individual must provide consent and typically undergo the standard underwriting process (medical exam, health questionnaire) just like any other life insurance policy application.

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