Key Man (Key Person) Insurance Calculator
Calculate the right amount of key person life insurance for your business based on replacement cost, lost profit during transition, recruiting expenses, and direct revenue dependency. Use this number when applying for coverage on a founder, CEO, or top producer.
| Salary Multiple ('+id+'x salary) | — |
| Recruiting + Onboarding Cost | — |
| Lost Profit During Transition | — |
| Outstanding Business Loans | — |
| Buy-Sell Funding Need | — |
| Recommended Coverage | — |
What Is Key Person Insurance?
Key person insurance (also called "key man" or "key employee" insurance) is a life or disability policy a business owns and pays for, with the business as beneficiary. The policy covers the death or disability of a critical employee — typically a founder, CEO, top salesperson, or technical expert — whose loss would significantly hurt company finances. The IRS allows the premium as a non-deductible business expense, but death benefits paid to the business are usually tax-free under IRC Section 101 (with some exceptions under Section 101(j) for employer-owned policies after Aug 17, 2006) (source: irs.gov).
Banks frequently require key person coverage as a condition of business loans — particularly SBA 7(a) loans where the lender wants assurance the loan can be repaid if the owner dies. Without coverage, the loan may be called or rates raised on the loss event.
How Much Coverage Is Right?
Two common methods. The salary multiple method uses 5-10x annual salary. Quick, but ignores business specifics. The components method adds: replacement recruiting cost + lost profit during transition + outstanding loans + buy-sell funding. The components method is more accurate for closely-held businesses where the key person represents 20-50%+ of revenue.
This calculator runs both methods and recommends the higher of the two — which is usually appropriate since underinsuring is a worse outcome than overinsuring (premiums are modest relative to coverage). Industry rule of thumb: total coverage of 8-10x salary for revenue-critical roles, 3-5x for replaceable roles.
Tax Treatment in 2026
Premiums paid by the business are not tax-deductible (since proceeds are tax-free). Death benefits to the business are tax-free if the policy meets IRC Section 101(j) Notice and Consent rules: (1) notify the employee in writing before the policy is bought, (2) get written consent that the company may insure the life, and (3) file Form 8925 annually. Without proper notice and consent, death benefits become taxable as ordinary income — a costly oversight (source: IRS Form 8925).
For the buy-sell side of business protection, see our group life insurance calculator. For broader business insurance needs, the business insurance cost calculator covers GL, BOP, and workers comp.
Term vs Permanent
Most businesses use term life for key person coverage — 10, 15, or 20-year terms aligned with the expected tenure of the executive or the loan amortization. Term is cheap and matches the time-bound risk. Permanent (whole or universal life) is used when the policy doubles as a tax-deferred savings vehicle for executive deferred comp or buy-sell funding. Permanent costs roughly 10-15x more in premium than term.