Key Person Insurance Calculator
Key person insurance protects your business against the financial impact of losing a critical employee to death or disability. The SBA recommends comparing two methods: the income multiplier (5 to 10 times salary) and the revenue contribution method (key person's revenue share times replacement period). Use the larger of the two as your target coverage amount. This calculator runs both methods and shows your recommended coverage.
Key person coverage formulas
Income Method = Annual Compensation x Income Multiplier
Revenue Method = Annual Revenue x Revenue Share % x Replacement Years
Recommended Coverage = max(Income Method, Revenue Method) + Outstanding Business Debt
The SBA recommends using the larger of the two primary methods, then adding any outstanding business debt for which the key person is a guarantor or whose servicing depends on their participation in the business.
Key person insurance planning considerations
- Obtain consent from the insured employee (required for most states under IOLI consent laws).
- Consider both life and disability coverage: the key person is more likely to become disabled than to die during their working years.
- Review coverage amounts annually as the business grows and the key person's value increases.
- If the key person is also a business owner, buy-sell agreement funding may overlap with key person coverage needs. Consult an attorney and insurance advisor to coordinate.
Frequently asked questions
What is key person insurance?
Key person insurance (also called key man or key employee insurance) is a life or disability insurance policy owned by the business on the life of a key employee whose death or disability would cause significant financial harm to the business. The business pays the premiums and is the beneficiary. Proceeds can be used to recruit and train a replacement, pay off business debts, or compensate for lost revenue.
How much key person coverage do I need?
There are two common methods. The income multiplier method uses 5 to 10 times the key person's annual compensation. The revenue contribution method calculates the key person's share of annual revenue or profit and multiplies it by the time needed to find and train a replacement (typically 1 to 3 years). The SBA recommends using the larger of the two estimates.
Is key person insurance tax deductible?
Generally, premiums for key person life insurance are not deductible if the business is the beneficiary (IRC Section 264). However, if the policy is structured as executive bonus (IRC Section 162), premiums may be deductible as compensation expense. The death benefit received by the business is generally received income-tax-free (IRC Section 101). Consult a tax advisor for your structure.
What types of insurance policies are used for key person coverage?
Term life insurance is the most cost-effective option for pure protection. Permanent life (whole life or universal life) can also accumulate cash value that can be used for executive benefits. Key person disability income insurance covers the scenario where the key person survives but is too ill or injured to work, which may be a more likely event than death.
Who qualifies as a key person?
A key person is anyone whose skills, knowledge, relationships, or leadership are critical to the business's revenue and survival. Common examples include the founder, top salesperson, lead technical expert, or CEO. If the loss of one individual would require significant time and cost to replace, or would result in lost contracts or revenue, that individual qualifies.
Official sources
- SBA: SBA Business Insurance Guide.
- IRS: Notice 2009-48: Key Employee Insurance.
- NAIC: Life Insurance Consumer Guide.
Reviewed by the CalculatorHub team, edited by James Graham, 14 June 2026. See our methodology.