Key Person Life Insurance 2027 Coverage Calculator

Key person life insurance protects a business from the loss of a critical employee — founder, CEO, top salesperson. Most lenders require it on SBA loans. 2027 face amounts use 5-10x salary OR contribution-to-profit OR replacement cost methods. This calculator runs all three.

What Key Person Insurance Actually Does

Key person life insurance is owned by the BUSINESS, premiums paid by the BUSINESS, beneficiary is the BUSINESS. When the insured employee dies, the death proceeds go to the company to: (1) pay off business debts the key person was driving revenue to service, (2) fund recruiting and ramp of a replacement (often $200K-$1M+ for executive roles), (3) reassure customers, employees, and lenders the business will survive, (4) fund a buyout of the deceased's equity interest.

Three Methods To Calculate Coverage

Salary Multiple (5-10x): simple but blunt. Use 5x for replaceable support roles, 8x for important managers, 10x+ for irreplaceable founders. Contribution-to-Profit × Replacement Years: best for revenue-driving key people. If 35% of profit traces to the CEO, replacement takes 3 years, profit is $500K — coverage = $500K × 35% × 3 = $525K. Replacement Cost: recruiter fee (25-33% of salary, often $50K-$200K) + ramp-up lost productivity (often 6-18 months) + salary continuation. Pick the highest of the three.

Tax Treatment Under IRC 101(j)

Death proceeds are received income-tax-free by the business — but only if the strict notice and consent requirements of IRC Section 101(j) are met. The insured employee must be notified IN WRITING before the policy is issued, must give WRITTEN CONSENT, and the notice must disclose maximum face amount and that the employer is or will be a beneficiary. Skip these steps and death proceeds become fully taxable income. The company also must annually file Form 8925 reporting employer-owned life insurance contracts.

Key Person Coverage Mistakes

(1) Skipping IRC 101(j) notice and consent — death proceeds become taxable income if employee wasn't notified in writing before policy issue. The paperwork is simple; the tax cost of skipping it is enormous. (2) Owning policy personally instead of by the business — proceeds end up in the wrong place (or trigger estate tax). The business should own, pay, and collect. (3) Choosing permanent insurance when term is enough — for a 10-year SBA loan or 15-year growth horizon, level term is dramatically cheaper. (4) Failing to update coverage as the company grows — a $1M policy on a co-founder set at company formation is woefully inadequate at $20M revenue.

Last updated May 2026. Sources cited in tool output.