Tools

Key person insurance calculator

Size key person life insurance four ways, from compensation, lost profit, replacement cost and loans, and see a range and a suggested amount with the reasoning.

Runs entirely in your browser: nothing you enter is sent or stored by this site. Results are estimates for planning, not a quote or advice.

How to use it

Run it for one person at a time: an owner who brings in the clients, a lead engineer, a top salesperson. The starting figures are examples; replace them with yours.

  1. Multiple of compensation. Enter the person's annual compensation and a multiple. The 5 shown is an example, since practices vary.
  2. Contribution to profit. The annual profit you would lose without them (profit, not revenue) and the number of years it would take to replace that contribution.
  3. Replacement cost. Recruiting (search fees, a signing bonus, relocation), training and onboarding, and the margin lost while a successor ramps up: revenue minus costs that would also stop.
  4. Loans and guarantees tied to this person. Debt a lender could call, or that the person personally guarantees. Your loan documents and your lender will tell you.

The math

  • Method 1: compensation × multiple.
  • Method 2: annual profit × years to replace.
  • Method 3: recruiting + training + ramp-up loss.
  • Method 4: loans and guarantees.

The suggested coverage takes the larger of methods 2 and 3, adds method 4, and rounds up to the next $10,000. If methods 2 and 3 are both zero, it falls back to method 1. Methods 1 to 3 are also shown as a range from lowest to highest. Method 1 is a quick cross-check.

Why the larger of 2 and 3 instead of the sum? Lost margin during ramp-up is part of lost profit, so adding both would count the same dollars twice. Loans go on top because they are a separate, contractual claim on the business.

Hypothetical: compensation $150,000 with a multiple of 5 gives $750,000. Profit of $200,000 for 2 years gives $400,000. Recruiting $50,000, training $25,000 and ramp-up $100,000 gives $175,000. Loans are $300,000. The larger of $400,000 and $175,000 is $400,000; adding $300,000 gives $700,000. The range of methods is $175,000 to $750,000.

Assumptions and limits

  • Judgment in, judgment out. Years to replace and ramp-up loss are estimates. Test a cautious and a hopeful version.
  • Possible overlap with loans. If the person's profit would have repaid the loan, adding both is conservative. The tool adds them in full.
  • Insurer underwriting. Insurers apply their own financial underwriting. They will want to see why the amount fits the person's value to the business, and usually cap coverage based on compensation, age and the company's finances, so the amount you apply for may not be the amount you get. The business needs an insurable interest in the person.
  • Who owns it. The business owns the policy, pays the premium and is the beneficiary. Premiums are generally not deductible; ask a CPA about your situation.
  • Notice and consent. Before an employer-owned policy is issued, the insured employee must get written notice and give written consent, or the death benefit can become taxable under IRC 101(j). See Employer-owned life insurance: notice and consent rules under IRC 101.
  • Not covered: disability or departure. Death is not the only way to lose a key person; see key person disability insurance: protecting the business when a leader cannot work.
  • Not a buy-sell. Funding an owner's buyout is a separate question; use the buy-sell agreement funding calculator.

The result is a first number to bring to a broker, along with the reasoning behind each piece. Read key person insurance: protecting the business from a loss of talent for how policies, term lengths and ownership are chosen. For a lender-required policy, see SBA loans and the life insurance requirement: when it applies.

Last reviewed October 10, 2026

Related guides

Key person insurance: protecting the business from a loss of talent How key person life insurance works, how to size it, the IRC 101(j) notice-and-consent rules and Form 8925, tax treatment, and when to add disability cover. Key person disability insurance: protecting the business when a leader cannot work How key person disability insurance protects a business when a leader is disabled; how it differs from overhead and buy-out coverage, and underwriting. Employer-owned life insurance: notice and consent rules under IRC 101(j) What IRC 101(j) and Form 8925 require of employers that own life insurance on employees: written notice and consent before issue, exceptions, fixes, and filing. Business succession planning and the insurance that funds it How a succession plan uses buy-sell agreements, life and disability insurance and key person coverage to transfer a closely held business smoothly. SBA loans and the life insurance requirement: when it applies When SBA 7(a) and 504 loans require owner life insurance under SOP 50 10 8.1, how the amount is figured, and what the collateral assignment involves.

Terms used here

Key person insurance Life or disability insurance a business owns on a critical owner or employee, paid to the business to offset the financial hit of losing that person. Corporate-owned life insurance (COLI) Life insurance a company buys on its employees' lives, with the company as owner and beneficiary, often used to fund benefits or cover key people. Insurable interest A real financial stake in the thing insured, such that you would lose money if it were damaged or a person died; without one a policy generally cannot pay. Buy-sell agreement A contract among a business's owners that sets who can buy a departing owner's share, at what price, and how the purchase is funded.

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