Key Person Insurance Calculator
Calculate how much key person (key man) life insurance your business needs. Enter the key employee's revenue contribution, replacement cost, and outstanding obligations to determine the right coverage amount for business continuity planning. Free, private — runs entirely in your browser.
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.
Frequently Asked Questions
Who should get key person insurance?
Any business where one or more individuals are critical to operations, revenue, or lender relationships. Common key persons include founders and CEOs, top salespeople with personal client relationships, lead engineers or developers with specialized knowledge, and anyone whose departure would trigger loan covenants or investor concerns. The SBA recommends key person coverage for most small businesses.
How much does key person insurance cost?
Key person insurance uses standard life insurance pricing based on the insured's age, health, tobacco use, occupation, and coverage amount. For a healthy 40-year-old non-smoker, expect approximately $500–$1,500 per year per $1 million in 20-year term coverage. The business pays the premiums as the policy owner and beneficiary.
Are key person insurance premiums tax-deductible?
No. Under IRC Section 264, premiums on employer-owned life insurance where the employer is a beneficiary are not deductible. However, the death benefit is generally income tax-free under IRC Section 101(a). Employers must obtain written consent from insured employees and file IRS Form 8925 annually to preserve the tax-free status of the death benefit.
What is the difference between key person insurance and buy-sell insurance?
Key person insurance compensates the business for financial losses from losing a critical employee — lost revenue, replacement costs, and loan obligations. Buy-sell insurance funds a buy-sell agreement, providing cash for surviving owners to purchase the deceased owner's equity stake. A business may need both: key person coverage for operational disruption, and buy-sell funding for ownership transfer.
Should I buy term or whole life for key person coverage?
Term life is recommended for most key person situations because the need is temporary — you need coverage until the business can survive without the individual, typically 10–20 years. Whole or universal life may be appropriate if the key person relationship is indefinite (e.g., a permanent founding partner) or if the business wants to build tax-advantaged cash value as a retention incentive via a split-dollar arrangement.
How do I determine the revenue attribution percentage?
Estimate what percentage of company revenue would be lost or at risk if the key person were no longer with the business. For a solo founder, this could be 80–100%. For a top salesperson, calculate their personal sales as a percentage of total revenue. For a technical founder, estimate the product revenue risk from losing their expertise. Be conservative — overestimating attribution unnecessarily inflates premiums, while underestimating it leaves the business underinsured.