How Much Key Person Coverage Does Your Business Need?

A key person insurance amount is the sum a business needs to cover the financial hit if an essential owner or employee dies. A simple worksheet gets you to a starting figure you can defend. This guide walks through it step by step for owners in Miami, Fort Lauderdale, West Palm Beach, Orlando, Tampa and Jacksonville, and for Indian-American and NRI owners with Florida business interests.

What a revenue multiple can and cannot tell you

A revenue multiple gives a rough starting point. It is not an appraisal of the business or of the person. Key person insurance is a life insurance policy the business owns on an essential person, with the business as beneficiary. The Insurance Information Institute’s guide to key employee coverage describes it as compensation for financial losses caused by a key employee’s death or disability.

A multiple is a shortcut. Two companies with the same revenue can lose very different amounts when one key person leaves. The worksheet estimates a coverage amount for discussion. It does not replace the insurer’s underwriting, and the insurer sets the face amount it issues.

This is an informational guide. Insurance is offered by Nischay Rawal, a licensed insurance agent, separately from the accounting practice of NR CPAs & Business Advisors.

Gather the five inputs before you calculate

Collect five inputs before you do any math. Write down where each figure came from and the period it covers.

1. Annual revenue tied to the person. Use the last full year or a clear trailing twelve months. Note which sales, accounts or projects depend on this person.
2. Gross margin and net profit. Measure profit before and after the insured’s pay. That shows what the company actually keeps from their work.
3. The person’s role. Sales relationships, technical know-how, licenses and management decisions all cost a company differently when they’re lost.
4. Replacement time. Estimate the months needed to hire, train and rebuild the lost output.
5. Business obligations. List loans, leases and lines of credit that the company must keep paying during the transition.

Keep the list short and honest. Overstated inputs produce an overstated coverage figure.

Step-by-step worksheet: from revenue to lost contribution

Start with the revenue multiple, then check it against a profit-based estimate. Using two methods shows you where the numbers disagree.

Here is a hypothetical company. Every figure is an assumption, not a real case or a result.

• Annual revenue tied to the insured: $2,000,000 (assumption)
• Net margin on that revenue: 15% (assumption)
• Replacement time: 12 months (assumption)
• Revenue multiple chosen: 0.5 (assumption, and the owner must explain the choice)

Step 1. Multiply revenue by your chosen multiple. $2,000,000 × 0.5 = $1,000,000. This is the starting figure.

Step 2. Estimate the profit the insured produces each year. $2,000,000 × 15% = $300,000 per year, or $300,000 over a 12-month gap.

Step 3. Estimate the cost of replacing the role. Assume $120,000 for recruiting, a salary premium and reduced productivity during training.

Step 4. Put the results side by side. The $1,000,000 method and the profit method differ. The margin and multiple assumptions drive most of that gap, so test them first.

Turning the lost-profit gap into a coverage amount

Add the pieces that the company would actually pay out after a loss. In this example, add the $300,000 profit shortfall and the $120,000 replacement cost. Then add a $250,000 assumed line-of-credit balance the company must keep serving during the transition. The hypothetical total is $670,000.

Compare that total with the $1,000,000 starting figure. The gap is a reason to discuss the numbers, not a verdict on either one. Your own figures will change the result.

Treat the total as an estimate for discussion. The insurer decides the face amount it issues after underwriting. Review the worksheet again when revenue, the person’s role or the company’s debts change. A figure that fit last year may not fit this year.

How much key person life insurance costs

Premiums depend on the insured’s age, health history, tobacco use, the policy type and the face amount. The insurer sets the premium schedule. Term and whole life policies are priced differently, so the same face amount can cost very different sums.

This page does not quote premiums. A premium figure comes only after the facts and the insurer’s underwriting are reviewed with you. Any number you see before that step is a guess, not a quote.

Premium treatment and cash surrender value explained

Tax treatment of premiums and benefits depends on the facts and on how the policy is structured. A CPA reviews these points with the owner before the purchase.

For the benefit, the IRS life insurance proceeds FAQ explains the general exclusion from gross income, and says interest paid on proceeds is taxed. The IRS guidance on taxable proceeds says taxability depends on the facts. For employer-owned contracts, the amount excluded from gross income is limited to the premiums and other amounts the policyholder paid for the contract.

Cash surrender value is the amount you may receive if a permanent policy is surrendered, after charges. Florida law requires the agent, when a surrender is recommended and the agent does not recommend that the proceeds be used to fund or purchase another annuity or life insurance policy, to give written information before the surrender, including surrender charges, possible tax consequences and any forfeited death benefit (Fla. Stat. § 627.4553).

Loans matter too. Under Fla. Stat. § 627.458, a policy may provide that it terminates once total debt, including interest, equals or exceeds the loan value. This section does not apply to term policies or to term insurance benefits provided by riders or supplemental policy provisions. The insurer must mail at least 30 days’ notice first. Unpaid loans can shrink the death benefit long before any claim.

Illustrations show guaranteed and non-guaranteed values separately. Non-guaranteed values, including any dividends, are not guaranteed.

Ownership and residency questions that change the worksheet

Who owns the policy, and who is insured, can change the worksheet. A business generally needs written consent from the insured before it buys coverage. Under Fla. Stat. § 627.404, a business has an insurable interest in the life, body and health of its owners, directors, officers, partners, and managers, or any affiliate or subsidiary’s of them, and of its key employees or key persons, if written consent is obtained from those key employees or persons before the insurance is purchased. The business also may not retaliate against a key person who declines consent.

Ownership affects estate tax too. Under 26 U.S.C. § 2042, insurance on a decedent’s life is included in the gross estate when it is receivable by the executor, and when it is receivable by other beneficiaries if the decedent held any incident of ownership at death, alone or with another person.

Owners who plan to move to India, or whose visa status may change, should revisit the policy. A move or a status change can affect the coverage decision. Trust or holding company ownership can change who controls proceeds and how they reach the business. For the full range of options, see our key person insurance guide.

Bring your worksheet to a coverage review

Bring your completed worksheet to a coverage review with Nischay Rawal, a licensed insurance agent. That review is the step where your figures get checked against the insurer’s rules and your company’s debts and role. If you’re an owner who finished the worksheet and isn’t sure the number still matches revenue, debts and the insured’s role, contact our office to start.

Common questions