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 with no medical exam.
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 with no medical exam: how much key person coverage does a business need?
- What would really happen?
- How long should key person coverage last?
- Why small businesses need it most
- What if you miss a payment?
- Riders worth knowing about
- Key person insurance amount: two different jobs for business life insurance
- Does your business need it?
- Frequently asked questions
Key person insurance with no medical exam: 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.
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.
Why small businesses need it most
The smaller the team, the more each person matters. A small business may depend on one or two people for sales, delivery or the know-how that keeps clients coming back.
- Identify who would be hardest to replace.
- Estimate the financial impact of losing them.
- Choose a term that covers the transition period, or permanent coverage for long-term needs.
- Review the coverage as the business grows.
What if you miss a payment?
Life insurance only works if it is in force when it is needed. Premiums can usually be paid monthly, quarterly or yearly. Paying yearly can cost a little less overall.
If you miss a payment, most policies have a grace period, often about a month, when coverage continues. After that the policy can lapse. Some policies can be reinstated within a set time, but the insurer may ask new health questions.
Tip: Automatic payments from a checking account are the simplest way to avoid a lapse.
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.
Riders worth knowing about
Riders let you shape a policy around your situation. Here are the ones people ask about most. Not every carrier offers each one, and terms differ.
Living benefits
Accelerated benefit riders can pay part of the death benefit early after a qualifying terminal, chronic or critical illness. Many carriers include a terminal illness rider at no added cost.
Waiver of premium
If a covered disability keeps you from working, this rider can keep the policy going without premium payments for as long as the disability lasts, subject to the policy terms.
Return of premium
Pays back the premiums you paid if you outlive the term. It raises the cost, so compare it with a plain term policy before deciding.
Child and spouse riders
Add modest coverage for family members to your own policy. They are convenient, but a separate policy for a spouse is often more flexible.
Key person insurance amount: two different jobs for business life insurance
| 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.
