Key Man Insurance Explained
What key person insurance is, when a business needs it, and the two common ways to size coverage on a critical owner or employee.
Key man (key person) insurance is a policy a business owns on a critical owner or employee, so the company has cash to survive the disruption if that person dies.
What key person insurance is
The business is the owner, the premium payer, and the beneficiary of a life insurance policy on a person the company cannot easily replace. The death benefit flows to the business, not to the family, and is used to keep operations running through the transition.
When a business needs it
When one person drives a large share of revenue, holds the key client relationships, or carries specialized knowledge that would take a year or more to replace, and their loss would threaten the company's ability to keep paying its bills, cover payroll, or service its debt.
Sizing by salary multiple
A common rule of thumb is 5 to 10 times the key person's annual compensation. It is quick, defensible, and produces a reasonable starting figure for most small and mid-sized businesses.
Sizing by replacement cost
Estimate the actual cost of recruiting a replacement, training them, and covering lost revenue during the transition period. This bottom-up figure often exceeds the salary-multiple result for revenue-critical roles like a top salesperson or a founding technical lead.
Worked example
A key salesperson earning 150,000 dollars sized at 8 times salary equals 1,200,000 of coverage. Cross-checked against an estimated 200,000 to recruit and train a replacement plus 12 months of lost commission-driven revenue, the salary-multiple figure holds up as a reasonable target.
Ready to run the numbers?
Use the key man insurance calculator to get a specific quantity for your project.
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Last reviewed . Educational estimates only; local conditions and codes take precedence. Consult a qualified professional for site-specific decisions.