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 partners.
Key person coverage only helps if the amount fits the real impact of a loss.
Here is how to size it with confidence.
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).
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Key person insurance quotes for partners: what is key person insurance?
Every small business has people it cannot easily replace: a founder with the client relationships, a partner with the technical skill, a top producer. Key person insurance gives the business cash to get through the loss of one of them.
- Owner: the business.
- Payer: the business.
- Beneficiary: the business.
- Insured: the key person, who must consent in writing.
Term or permanent coverage for a key person?
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.
Compare rates from several carriers in about two minutes. Free, no obligation.
Key person insurance amount: how much key person coverage does a business need?
There is no single formula, but these approaches are common. Insurers will also look at the business's finances to confirm the amount is reasonable.
- Multiple of compensation: a multiple of the person's salary and benefits.
- Contribution to profit: the share of profit tied to their work, for the years needed to recover.
- Cost to replace: recruiting, hiring and training a successor, plus lost productivity.
- Debt coverage: loans the business would need to repay or that the person has personally signed for.
Many businesses combine methods and choose a figure that would carry the company through a realistic transition period.
A worked example
Say you're 34 with a $150,000 mortgage balance and 16 years left, $19,000 in other debts, and an income of $55,000. Here's one simple way to size coverage:
| Item | Amount |
|---|---|
| Mortgage balance | $150,000 |
| Other debts | $19,000 |
| 4 years of income | $220,000 |
| Total to consider | $389,000 |
In this example, a 20-year term would outlast the loan (it ends around age 54). Your own numbers will differ; use this as a starting point and adjust for savings, other coverage and future costs like school.
Who key person insurance is for
Often a good fit
- a business that depends on one or a few people for revenue or operations.
- a business with loans an owner has personally signed for.
- Also consider: buy-sell funding if there are multiple owners.
Maybe not the right fit
- a business that could replace any role quickly without lost revenue.
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.