If your top salesperson, lead engineer or founder died tomorrow, what would it actually cost the business? This calculator adds up the revenue at risk, replacement expense, debt guarantees and lender requirements, then estimates your annual premium.
Situation: A 45-year-old founder personally generates $500,000 of annual revenue and guarantees a $250,000 equipment loan. The firm owns 100% of his shares worth $400,000 and expects six months of disruption.
Rate / rule: Revenue at risk = $500,000 × 6/12. Replacement cost $75,000. Debt guarantee $250,000. Buy-sell funding $400,000.
Calculation: $250,000 + $75,000 + $250,000 + $400,000 = $975,000 recommended coverage. Term policy at age 45 standard rating.
Situation: A 38-year-old VP of Sales contributes $500,000 of revenue but the company has three trained account executives and expects only three months of disruption. No loan guarantees.
Rate / rule: Revenue at risk = $500,000 × 3/12. Replacement cost $75,000. No debt, no ownership interest to fund.
Calculation: $125,000 + $75,000 = $200,000 recommended coverage. Younger age and preferred rating.
Situation: Two dentists own a practice 50/50. Each partner’s interest is worth $400,000 and one partner, 52, guarantees $250,000 of practice debt.
Rate / rule: Revenue disruption is minimal because the surviving partner absorbs the patients. The real need is buy-sell funding plus the debt guarantee.
Calculation: $400,000 buy-sell + $250,000 debt guarantee = $650,000. Revenue-at-risk is deliberately excluded.
Revenue at risk: the key person’s annual revenue contribution multiplied by the fraction of a year the business is expected to be disrupted. This is a gross-profit proxy — if you know the margin the person generates, use gross profit instead for a tighter number.
Replacement cost: executive search fee (typically 20–33% of first-year salary), signing bonus, relocation, and the productivity gap while the replacement ramps up — often six to twelve months.
Debt guarantee: lines of credit and term loans where the lender can demand repayment or re-underwrite the facility after the guarantor dies. Lenders may also require key person coverage outright as a loan covenant.
Buy-sell funding: the deceased owner’s share value, so the surviving owners can buy out the estate without selling assets or admitting heirs as partners.
Premium is estimated from indicative term rates per $1M by age band and health rating; permanent coverage typically costs two to four times more per dollar of face amount.
| Age band | 20-year term | 30-year term | Permanent |
|---|---|---|---|
| 30 – 39 | $600 – $1,100 | $1,100 – $2,000 | $8,000 – $14,000 |
| 40 – 49 | $1,300 – $2,600 | $2,600 – $5,000 | $16,000 – $28,000 |
| 50 – 59 | $3,200 – $6,500 | $6,000 – $12,000 | $30,000 – $55,000 |
| 60 – 65 | $8,000 – $16,000 | — | $50,000 – $90,000 |
Key person insurance is a life policy owned by the business, on an employee or owner whose death would materially damage the company. The business pays the premium, owns the policy, and is the beneficiary — so the proceeds are received by the company, not by the individual’s family. That structure is what distinguishes it from ordinary personal life insurance.
Lenders recognise the exposure. Many commercial loan covenants on a small business require key person coverage naming the lender as an interested party, precisely because the death of a controlling owner or top rainmaker is a credit event. Insurers and commercial lenders typically expect coverage sized to the outstanding debt plus a multiple of the person’s contribution.
The coverage need is genuinely business-specific. A professional practice where patients can be absorbed by surviving partners may need coverage only for the buy-sell. A founder-led technology firm where one person holds the architecture in their head may need coverage several times that. The calculator deliberately reports each component separately so you can see which driver is doing the work — and drop the ones that do not apply.
Premiums are not tax-deductible when the business is the beneficiary, but the death benefit is generally received income-tax-free. This is the opposite of a group term arrangement where premiums on coverage above $50,000 are a taxable fringe benefit to the employee.
Three different problems get confused constantly, and each needs its own solution:
1. Key person coverage reimburses the business for the economic damage of losing someone — lost revenue, replacement cost, lender pressure. The business owns it and receives the proceeds.
2. Buy-sell funding provides liquidity so surviving owners can purchase the deceased owner’s interest from the estate. Ownership matters here: in a cross-purchase arrangement each owner buys policies on the others; in an entity-redemption arrangement the company owns the policies and redeems the shares directly. The wrong structure creates tax problems on the proceeds.
3. Personal coverage protects the individual’s family, is owned personally, and is what the life insurance needs calculator sizes. A founder usually needs all three, and using one policy for all three purposes is a common and expensive mistake.
Document the buy-sell in a written agreement that specifies the valuation method, the funding mechanism and the trigger events. An unfunded buy-sell promises a purchase the estate may not be able to wait for; an unagreed funding structure can turn an insurance payout into a taxable event for the survivors.
| Arrangement | Premium deductible? | Death benefit taxable? |
|---|---|---|
| Business owns policy, business is beneficiary | No | No (generally) |
| Cross-purchase buy-sell, each owner pays | No | No |
| Entity redemption, company pays | No | No, but can raise basis/AMT issues |
| Group term life up to $50,000 | Yes | No |
| Group term above $50,000 | Yes | Imputed income to employee |
Where the business is both owner and beneficiary, premiums are a non-deductible business expense and proceeds are typically received free of income tax under §101(a). Entity-redemption arrangements can trigger alternative minimum tax or basis complications, and transfers of an existing policy can invoke the transfer-for-value rule, which taxes the death benefit. Review the structure with a CPA before signing.
⚠ Important Disclaimer: Premium figures are indicative estimates only. Actual rates depend on the insured’s full medical history, underwriting class, policy features and the insurer. Tax treatment of key person and buy-sell arrangements is fact-specific. Consult a licensed insurance broker and a CPA or tax attorney before purchasing coverage or executing a buy-sell agreement.