Key Person Insurance Cost

Frequently Asked Questions

What is key person insurance?

Life and/or disability insurance owned by the business on a key employee (owner, top salesperson, key engineer) whose loss would significantly hurt the business. Death benefit goes to the company to cover lost revenue, recruitment costs, and creditor obligations.

How much key person insurance does a business need?

Common formulas: 5-10x the key person's annual compensation, or the projected lost profits over 1-3 years of replacement. Lenders may require key person coverage equal to outstanding business loans (often SBA-required).

How much does key person insurance cost?

A 10-year term policy for a healthy 45-year-old executive: $1M coverage averages $35-$60/month. Premiums are not tax-deductible (because death benefit is tax-free to the business per IRC 101(j) when properly notified).

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This calculator provides estimates based on general assumptions. Actual insurance costs and coverage vary by insurer, location, and individual risk factors. Not a quote or binding offer. Contact insurance providers directly for accurate quotes and coverage options.

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How This Calculator Works

Key person insurance is a term life policy a company buys on a founder, top salesperson, or sole technical lead, where the business is owner, payor, and beneficiary. If that person dies, the proceeds offset lost revenue, recruiting costs, and lender covenants. This tool first determines how much coverage to carry using one of three methods, then prices the annual term-life premium for that amount based on the insured's age, sex rate class, health class, and the term length. You enter the key person's salary, pick a coverage method, and set age, sex, health class, and term; the calculator returns recommended coverage, annual and monthly premium, total term cost, the rate per $1,000, and a 5×-vs-10× comparison.

Formula / Method

Coverage comes from one of three methods: multiple of salary (salary × multiplier, 5–10× recommended), contribution to profits (multi-year profit attribution you enter), or replacement cost (recruiter fees + ramp time + lost contracts). The result is rounded to the nearest $25,000. Premium = (coverage ÷ 1,000) × base rate per $1K × term multiplier × health multiplier. Base rates are interpolated from market tables by age and sex (a 40-year-old male is about $1.45 per $1K/yr for 10-year term). The term multiplier is 1.00 for 10 years, 1.20 for 15, 1.40 for 20, and 1.85 for 30. Health multipliers run 0.75 (Preferred Plus) to 2.50 (smoker). Total term cost = annual premium × term years.

Worked Example

A 40-year-old male in Preferred health, $150,000 salary, 8× multiplier, 10-year term. Coverage = 150,000 × 8 = $1,200,000. Base rate ≈ $1.45 per $1,000; term multiplier 1.00; Preferred health 0.90. Premium = (1,200,000 ÷ 1,000) × 1.45 × 1.00 × 0.90 = 1,200 × 1.305 ≈ $1,566/year, about $131/month, or roughly 1.04% of salary. Over the full 10-year term that is about $15,660. A rule of thumb for healthy adults under 45 is $3–10/month per $10,000 of coverage, which brackets this result.

Common Mistakes

Insuring at less than 5× salary - underinsurance leaves recruiting costs, lost contracts, and lender default clauses uncovered.

Assuming premiums are deductible - under IRC §101(j) they are not deductible to the business.

Skipping the §101(j) notice-and-consent signed before issuance - without it the death benefit can become taxable.

Forgetting the annual Form 8925 filing that employer-owned life insurance requires.

Pricing only the 10-year term when lender financing or product lead times call for 20 or 30 years (term multiplier up to 1.85×).

Tips & FAQ

How much coverage is standard? The 5–10×-salary band is the rule of thumb; lenders often require coverage equal to 1× the outstanding loan balance on top. Who should be covered? Founders and majority owners, top revenue producers (rainmakers), sole technical leads or patent holders, and anyone who personally guarantees company debt. What drives the premium? Age and sex set the base rate, health class can swing it from 0.75× to 2.50×, and longer terms cost more per year. Typical figures: a healthy 40-year-old male at $1M, 10-year term, runs roughly $45–60/month; a 50-year-old at standard health $110–150/month; a 40-year-old female at $500K preferred $15–25/month. These are planning estimates from 2024–2025 market rate tables (LIMRA, Quotacy, Policygenius), not a quote, binding offer, or tax/insurance advice - confirm coverage and pricing with a licensed agent and the tax treatment with a CPA.

Key Person Insurance Cost

Frequently Asked Questions

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