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 s corp.
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 s corp: how key person insurance works
- Key man insurance coverage amount: how key person insurance is taxed
- Is key person coverage the same as a buy-sell policy?
- Key person insurance amount: how underwriting works for key person insurance
- A worked example
- Why work with an independent agency
- Who key person insurance is for
- Frequently asked questions
Key person insurance for s corp: how key person insurance works
Key person insurance is life insurance a business buys on an owner or employee whose loss would seriously hurt the company. The business owns the policy, pays the premium and is the beneficiary.
If the key person passes away, the business receives the death benefit. It can use the money to replace lost revenue, recruit and train a successor, pay off business debts or reassure lenders and clients during the transition.
Key man insurance coverage amount: how key person insurance is taxed
Key person coverage has two tax points to remember. Premiums are generally not deductible. Death benefits are generally income-tax-free to the business if the notice and consent rules for employer-owned policies are followed.
Tip: Get the insured's signed consent and notice before the policy is issued, and keep copies with your business records.
Compare rates from several carriers in about two minutes. Free, no obligation.
Is key person coverage the same as a buy-sell policy?
Key person insurance and buy-sell funding are often confused. Key person coverage protects the business's operations. Buy-sell funding pays for a change in ownership, according to a written agreement.
If you have partners, talk with an attorney about a buy-sell agreement and use life insurance to fund it.
Key person insurance amount: how underwriting works for key person insurance
Every life insurance application goes through underwriting. That is the insurer's review of who you are, how healthy you are and how much risk the policy carries. The result is your rate class, which sets your price.
- Your answers. Health history, medications, tobacco or nicotine use, family history, travel and hobbies.
- Records. Prescription history, a shared database of prior insurance applications, and often your driving record.
- Sometimes an exam. A short visit from a paramedical examiner to check height, weight, blood pressure and lab samples.
- Sometimes medical records. For larger amounts or certain conditions, the insurer may ask your doctor's office for notes.
Insurers do not all weigh these things the same way. One carrier may treat a managed condition, like controlled blood pressure, more favorably than another. That is a big reason to compare several carriers rather than accept the first offer.
Be complete and honest on the application. Policies have a contestability period, usually the first two years, when the insurer can review a claim against what you said when you applied.
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.
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 work with an independent agency
A captive agent works for one insurance company and can only offer its policies. An independent agent is appointed with several carriers and can compare them side by side.
That matters because carriers price the same person differently. One may be friendlier to a past health condition, another to tobacco users, another to larger coverage amounts. Comparing several gives you a better chance at a fair price.
You do not pay extra to use an independent agent. Agents are paid by the carrier you choose, and the premium is the same as buying from that carrier directly.
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.