What Is Key Man Life Insurance? How It Works & Costs In 2022!

By Sa El Published:

As a small business owner, it’s natural to worry about your co-workers' health for more reasons than one. 

On the financial side, should one of your co-founders or employees unexpectedly passes away, you could be left without a key member of your team. 

key man insurance

Key man life insurance is one way to lessen the burden of that loss.  Today, we’ve put together a guide to help you learn more about how key man insurance works and what it costs. 

What is Key Man Life Insurance?

Key man life insurance is a common form of corporate-owned life insurance (COLI). It’s also commonly known as key employee insurance or key person insurance.

It protects your company if one of your foremost employees—known as a 'key person' in the policy—dies. You can take out a key person policy on any member of your team—even yourself.

Essentially, you take out a life insurance policy (or, in some cases, disability insurance) on essential members of your organization.

Those members become the insured parties, but your company is the beneficiary, as opposed to a loved one. 

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The final insurance policy premium for any policy is determined by the underwriting insurance company following the application.

Your company also owns and pays for the policy—not the insured party.

This type of insurance is designed to prevent financial loss while you seek or train a replacement for the lost employee. 

When Would You Need Key Man Life Insurance?

Your business depends on your employees. Your company wouldn’t exist without them—especially your key employees.

Think of the person that your company relies upon the most to keep afloat. Someone that you invested time—perhaps even years—into training that holds a high level of responsibility.

Ask yourself:

  • If this person were no longer in my company, would I be able to keep my business running? 
  • Would my clients and customers seek the services of rival companies?
  • Do I have someone who could take over their role right away?

Remember, it takes a lot of effort and money to find the right replacement for such a key person. During that time, you risk losing significant profit or even your business.

If you have someone like that in your company, then you have a key employee—and if you have a key employee, that’s when your business likely needs key man insurance.

Many banks also require that your company purchase key person insurance to receive approval for loans or credit. 


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Key Man Insurance Vs. SMB Life Insurance

You may be wondering, “What’s the difference between key man insurance and small business life insurance?”

Simply put, key man insurance deals primarily with death benefits, whereas small business insurance deals with a greater variety of risks. 

Small businesses deal with:

  • Rival companies poaching employees
  • Employees becoming disabled or unable to work due to other events 
  • Relatives of deceased employees wanting to sell their stake in the company

Small business life insurance offers some potential solutions to these issues, such as:

  • Executive benefits for top employees, including life insurance
  • Key person insurance for disability
  • The ability to liquidate business assets to protect personal assets
  • A buy/sell agreement, where joint business partners purchase insurance on each other

Essentially, key person insurance is one form of small business life insurance. It’s up to you to assess whether your company faces additional employee-related challenges.

If so, it may be worth considering a more comprehensive small business life insurance policy or multiple policies. 

How Much Coverage Do You Need?

In general, there’s no set rule for how much key man life insurance coverage you need.

After all, it’s hard to put an exact dollar amount on a person’s value to your company. 

Life insurance companies may make this easier by providing pre-selected formulas. 

key person life insurance

If they don't, you'll want to look through your records and see how much revenue the employee has generated for the company, such as in total sales, positive customer reviews, and clients secured.

You’re also required to get the employee's consent before purchasing key person insurance due to the 2006 Pension Protection Act, which mandates employers to inform workers of life insurance policies under their name.

When you speak with your employee, that's a good time to discuss their value to the company. 


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Cost of Key Man Life Insurance

The cost of key man life insurance will vary depending on the plan in question. The premium can go up or down depending on whether you purchase term life, whole life, or a variable plan.

Term life plans generally offer the best value, as they have lower premiums. First, determine the general range of how much you’ll need the plan to cover.

Then, it’s wise to ask for quotes for each plan amount, such as the premium for a key man insurance plan valued at $100,000 versus a plan valued at $250,000.

Finally, bear in mind that any premiums you pay on key person life insurance plans are not tax-deductible on federal income taxes, per the IRS.

Taking Action

In the aftermath of an employee’s death, you may be emotionally devastated and unable to deal with the sudden financial hardship resulting from the loss of a crucial worker.

Planning for your company's financial future will leave you prepared in case of a tragic loss. 

Key man insurance is one way to do that. If you need a key person life insurance policy, you can get immediate quotes and coverage by clicking here or on any of the above buttons. 

Sa El

About the author

Sa El is the Co-Founder of Simply Insurance and a licensed Insurance Agent with over 13 years of experience in the industry.  He specializes in Life & Health Insurance and is certified in Long Term Care Insurance in the state of Georgia. a licensed real estate agent in the state of Georgia (License #382602), an entrepreneur, insurance educator, and freelance writer.

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