The short answer
A business usually sizes key person insurance with one of a few methods. Common ones are a multiple of the person's pay, the profit the business would lose, or the cost to recruit and train a replacement. Debts the person has signed for count too. Insurers then check that the amount fits the role.
This guide answers the most common questions about key person insurance for law firms.
How much key person insurance does a business need? Enough to carry the company through the loss of someone it depends on. The right figure comes from a few practical methods, not a guess.
This guide walks through the common approaches and what insurers look at.
Part of our complete guide: Key Person Insurance: The Complete Guide.
Quick answer
Use compensation, profit contribution, replacement cost or debts as a base. Insurers check that the amount is reasonable for the business. Pick a term that covers a realistic transition period.
MarketView Agency is an independent insurance agency (National Producer Number 18345705).
On this page
- Key person insurance for law firms: how much key person coverage does a business need?
- What would really happen?
- How long should key person coverage last?
- Key person insurance amount: why small businesses need it most
- Add-ons (riders) that can help
- Why compare with an independent agent
- When a lender asks for life insurance
- Key man insurance coverage amount: key person insurance vs. buy-sell funding
- Does your business need it?
- Frequently asked questions
Key person insurance for law firms: how much key person coverage does a business need?
Start with what would actually happen if this person were gone tomorrow. Which clients might leave? Which projects would stall? How long would it take to replace them? Put rough numbers on those questions.
Insurers will review financial statements for larger amounts. A coverage amount tied to a clear business reason is easier to approve.
We cover this in detail in Key Person Insurance Tax Treatment, Explained.
What would really happen?
- List the revenue tied to this person's work or relationships.
- Estimate how long it would take to replace them and get back on track.
- Add recruiting, training and any temporary help.
- Add loans or credit lines that could be called or that they personally signed for.
- Compare the total with any savings the business could use.
Write down how you arrived at the number. Insurers ask, and the reasoning helps you revisit the amount as the business grows.
Compare rates from several carriers in about two minutes. Free, no obligation.
How long should key person coverage last?
Most businesses use term life for key person coverage. It is the most affordable way to cover the years the business depends on someone, such as until a successor is trained or a loan is repaid.
Permanent coverage can make sense when the need is long-term, for example a founder whose loss would affect the business for as long as they're involved, or when the policy may later be transferred to the person as a benefit. It costs more, and the cash value belongs to the business.
Key person insurance amount: why small businesses need it most
Large companies can absorb the loss of a key person. Small businesses often cannot. Key person insurance buys time and options when the business needs them most.
Add-ons (riders) that can help
A rider is an option you add to a policy. Some are built in at no extra cost, others add to the premium. Availability and terms vary by carrier and state, so check the details of any policy you consider.
- Accelerated death benefit. Lets you access part of the benefit early if you are diagnosed with a terminal illness, and on some policies a chronic or critical illness.
- Waiver of premium. Keeps the policy in force without payments if you become totally disabled, as defined in the policy.
- Child rider. Adds a small amount of coverage for your children under your policy.
- Disability income or payment rider. Some policies can pay a monthly amount for a set period if you cannot work due to a covered disability.
Riders are useful, but each one adds cost or complexity. Pick the ones that fit a real worry, and skip the rest.
How to get covered in 3 steps
- Pick who to cover and how much. Use a clear valuation method for the person's role.
- Compare carriers. An independent agent quotes several insurers and handles notice and consent paperwork.
- Apply and set up ownership. The business owns the policy, pays the premium and is the beneficiary.
Why compare with an independent agent
We are an independent agency, which means we are not tied to one insurer. We compare plans from several carriers and help you pick the one that fits.
- More choices. Several carriers, not one.
- Help with health history. Some carriers view certain conditions more favorably than others.
- No added cost. Premiums are set by the carrier, not the agent.
- No pressure. If a policy is not a fit, we will say so.
When a lender asks for life insurance
If a lender asks for life insurance as a loan condition, you usually do not need a special policy. A term policy with a collateral assignment to the lender typically works.
Keep the coverage in force for the life of the loan, and ask the lender to release the assignment when the loan is paid.
Key man insurance coverage amount: key person insurance vs. buy-sell funding
| Feature | Key person insurance | Buy-sell funding |
|---|---|---|
| Purpose | Protect the business from a loss | Buy out a departed owner's share |
| Beneficiary | The business | The business or the other owners |
| Who it helps | The company and its staff | The remaining owners and the departed owner's family |
| Paired document | None required | A buy-sell agreement |
Many businesses need both. Key person coverage keeps the company running; buy-sell funding gives the surviving owners cash to buy the departed owner's share at a fair price.
Does your business need it?
Often a good fit
- Companies where one or two people drive sales, hold key client relationships or have know-how that would take months to replace, and businesses with loans tied to an owner.
Maybe not the right fit
- Companies with deep benches where any role could be covered quickly, or with enough reserves to absorb a long transition.
