About the Key Person Insurance Calculator
Key person (or "key man") insurance is a life or disability policy a business buys on an owner or employee whose death would hurt revenue. The business pays the premium and is the beneficiary, so the payout can cover lost profit while it finds and trains a replacement, reassure lenders, and pay off loans the person guaranteed.
This calculator compares the two methods underwriters and advisers use most. The business-loss method adds up the profit you would lose during the vacancy and ramp-up period, the cost of recruiting and training a successor, and any business debt that would be called or become hard to service. The salary-multiple method simply multiplies the person’s total compensation, a quick check many insurers accept for initial quotes.
It is meant for founders, small-business owners, partners and CFOs preparing for a conversation with an insurance broker. The figures are planning estimates: insurers will ask for financial statements and set their own limits, and the policy should be coordinated with any buy-sell agreement between owners.
With the default inputs, the suggested key person coverage is $360,000. Change any value above to recalculate instantly.
How to use the key person insurance calculator
- 1Estimate the annual profit the person generates or protects.
- 2Enter how long it would take to hire a successor and get them productive.
- 3Add recruiting and training costs and any debt that would need repaying.
- 4Enter total compensation and a multiple for the quick cross-check.
- 5Pick a method and take the suggested amount to an insurance broker.
Formula and method
The business-loss method assumes the business loses all of the person’s profit contribution while the role is empty, and half of it while a replacement learns the job, so each ramp-up month counts as half a month of lost profit. Recruiting fees, relocation and training costs are added, along with any loans that would need to be repaid or that the person personally guaranteed.
The salary-multiple method multiplies total compensation (salary plus bonus) by a factor k, commonly 5 to 10. It is quick but ignores how much profit the person actually drives. Choosing "higher of the two" protects against underestimating either the profit effect or the cost of replacing a senior executive.
- Profit
- Annual profit attributable to the key person
- Vacancy
- Months the role is unfilled
- Ramp
- Months for a successor to reach full productivity
- k
- Compensation multiple
Worked examples
Sales director at a growing firm
Six vacant months plus half of a 12-month ramp-up equals 12 months of lost profit, or $200,000. Adding $60,000 hiring costs and $100,000 of guaranteed debt gives $360,000. Five times $150,000 compensation would suggest $750,000.
Founder-CEO with a $1M guaranteed loan
Fifteen effective months of $500,000 annual profit is $625,000; with $120,000 hiring costs and the $1,000,000 loan the loss method gives $1,745,000. Seven times $250,000 is $1,750,000, so the higher figure is used.
Lead engineer using a salary multiple
Five times $90,000 compensation suggests $450,000. The business-loss method is much lower at $105,000 (8 effective months of $120,000 profit plus $25,000 hiring), a sign the multiple may over-insure this role.
Frequently asked questions
How much key person insurance do I need?+
Most businesses insure either the profit lost during a replacement period plus hiring costs and debts, or 5 to 10 times the person’s compensation. Insurers usually require the amount to be justified by the person’s financial contribution to the business.
Are key person insurance premiums tax deductible?+
In the US, premiums are generally not deductible when the business is the beneficiary, and the death benefit is usually received income-tax free if the IRC §101(j) notice-and-consent rules for employer-owned policies are followed. Rules differ in other countries, so check with an accountant.
Should key person insurance be term or permanent life?+
Term life is the most common choice because it is cheap and the need is tied to a period, such as a loan term or the years until a successor is ready. Permanent policies are sometimes used when the cash value funds a deferred-compensation or buy-out plan.
Is key person insurance the same as buy-sell insurance?+
No. Key person cover replaces the business’s lost value and is owned by the company. Buy-sell (cross-purchase or entity redemption) insurance funds the purchase of a deceased owner’s shares from their estate. Many owners need both.
Can key person insurance cover disability?+
Yes. Key person disability insurance pays the business a monthly benefit or lump sum if the insured person cannot work because of illness or injury. It is usually bought alongside, not instead of, key person life cover, and benefits are typically capped at a share of the person’s compensation or the business’s documented loss.
Results are estimates for educational purposes and are not financial advice. Rates, fees and terms vary — confirm with your lender or a licensed advisor before making decisions.