Key Person Insurance Calculator

What Is Key Person Insurance?

Key person insurance (also called key man insurance or key employee insurance) is a life insurance policy a business purchases on its most valuable employees — typically founders, CEOs, top salespeople, or individuals with specialized skills critical to operations. The business owns the policy, pays the premiums, and is the beneficiary. If the key person dies or becomes permanently disabled, the business receives the death benefit to cover financial losses during the transition period.

These losses include revenue decline, recruitment and training costs for a replacement, potential loss of business relationships, and outstanding loans that may be called in. The SBA and most lenders recommend key person insurance for small businesses where one or two individuals drive a significant portion of revenue. Source: NAIC Life Insurance Resources.

How to Calculate Key Person Coverage

There are three recognized methods for determining an appropriate coverage amount. This calculator applies all three and recommends the highest value for maximum protection.

Revenue Replacement Method: Calculates the key person's annual revenue contribution (company revenue × attribution %) and multiplies by the recovery period in years — typically 2–10 years. For example, a key salesperson responsible for 40% of a $2 million company driving $800,000/year needs $4 million in coverage for a 5-year recovery window.

Cost-Based Method: Sums direct replacement costs — executive recruiting fees ($50,000–$200,000 for senior hires), estimated productivity loss during training (typically 50% of compensation for 1–3 years), and any outstanding business loans that a lender may call if the key person exits. Source: SBA Business Insurance Guide.

Compensation Multiple Method: Uses a simple multiple of the key person's annual salary and benefits — typically 5× to 10× — as a proxy for their economic value to the firm. This is the most straightforward approach and works as a quick sanity check on the other methods.

Most financial advisors recommend combining all three methods and insuring to the highest calculated value. Last updated May 2026.

Key Person Insurance Tax Treatment

Key person insurance premiums are not tax-deductible for the business. Under IRC Section 264, premiums paid on employer-owned life insurance where the employer is directly or indirectly a beneficiary cannot be deducted as a business expense. However, the death benefit received by the business is generally income tax-free under IRC Section 101(a), making the net tax treatment highly favorable.

An important exception: IRC Section 101(j) requires that the business obtain written consent from insured employees and file IRS Form 8925 annually — failure to comply can cause the death benefit to become partially taxable. For C-corporations, note that key person death benefits may also be subject to the corporate alternative minimum tax in certain scenarios. Always consult a qualified tax advisor for entity-specific guidance.

Term vs Permanent Coverage for Key Persons

Term life insurance is the most common and cost-effective choice for key person coverage because the protection need is typically temporary — the goal is coverage until the business can operate independently of the individual, usually 10–20 years. A healthy 40-year-old non-smoker can typically secure $1 million in 20-year term coverage for $500–$900/year.

Permanent (whole or universal) life may be appropriate when the key person relationship is expected to be indefinite (e.g., a founding partner who will never leave), or when the business wants to build a tax-advantaged cash value reserve that doubles as a retention incentive. Some businesses structure split-dollar arrangements that allow the insured employee to share in the policy's cash value — a powerful tool for retaining top talent.