How much key person insurance does a small business need?
Most small businesses size key person life insurance at five to ten times the person’s annual pay, or at the profit they bring in plus the cost of finding and training a replacement; the insurer then underwrites the amount against the business’s finances. The business owns the policy, pays the premium and receives the death benefit, and unlike buy-sell coverage it buys nobody’s share. Before the policy is issued, the person insured must be told in writing and agree in writing, or most of the benefit can become taxable.
Decide where your business goes.
- Will packageA last will and testament, prepared online from your answers.from $695
- Trust packageA revocable living trust with a certification of trust and a pour-over will, prepared online from your answers.from $1,495
Starting prices, per person. Couples can set up a joint trust for both of you, or two plans with $100 off the second.
- Free health care directive: Says who decides about your medical care if you cannot, and what you want.
- Free financial power of attorney: Names who can handle your money matters if you are alive but unable to act for yourself.
Boring Insurance Agency is a licensed insurance agency, not a law firm, and does not provide legal advice. No attorney-client relationship is created by using this service. These documents are self-help forms prepared from the information you provide. Laws vary by state, and your circumstances may require changes these forms do not make. We recommend you have an attorney licensed in your state review your documents before you sign them.
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Kevin Kelsey
Founder | Principal Agent
Founder and principal agent of Boring Insurance, CA License #6011822. He put off his own estate plan because he did not want to take the time to find a lawyer, then built the offer so owners can set up a will or living trust online and fund it with life insurance. He is a licensed agent, not an attorney, and these pages are not legal advice.
The rule of thumb, worked through
$75,000
- At 5 times
- $375,000
- At 10 times
- $750,000
$150,000
- At 5 times
- $750,000
- At 10 times
- $1,500,000
$300,000
- At 5 times
- $1,500,000
- At 10 times
- $3,000,000
A rule of thumb, not an underwriting standard. Carriers set the maximum from the business’s revenue and profit.
Key person or buy-sell
Who it protects
- Key person
- The business
- Buy-sell
- The other owners and your family
Who gets paid
- Key person
- The business
- Buy-sell
- The buyer of the share, or the company
What the money does
- Key person
- Covers lost profit, hiring, debt
- Buy-sell
- Buys the share at the agreed price
Sized by
- Key person
- Pay or profit contribution
- Buy-sell
- Share percentage times business value
The detail
For an employer-owned life insurance policy, the income tax exclusion is limited to "an amount equal to the sum of the premiums and other amounts paid by the policyholder for the contract," unless the notice and consent requirements are met before the policy is issued.
26 U.S. Code section 101 (Cornell Legal Information Institute)
The notice must tell the employee in writing that the employer intends to insure them and will be a beneficiary, and the employee must consent in writing.
26 U.S. Code section 101 (Cornell Legal Information Institute)
Generally, life insurance proceeds received because of the insured’s death are not included in the beneficiary’s gross income.
What this means for you
- Name the person honestly. The key person is whoever the customers, the lender or the license follow. In a small company that is often the owner, sometimes a lead technician or the one licensed engineer.
- Get the consent signed first. The written notice and consent must come before the policy is issued. It is one page and it protects the tax treatment of the whole benefit.
- Key person does not settle ownership. If the key person is also an owner, their share still needs a buy-sell plan and their own will or trust.
- Disability can hurt more than death. A key person who is alive and unable to work is a longer problem. Ask about key person disability coverage alongside the life policy.
Go deeper on any of these
Related questions
- Is key person insurance tax deductible?
Generally not, when the business is the beneficiary. Ask your CPA about your situation; in return the death benefit is generally received free of income tax if the notice and consent rules were followed.
- Can a one-person business buy key person insurance on the owner?
It can, and it gives the business money to wind down or to be sold in order. For many solo owners, personal life insurance payable to their trust does the same job more simply.
- How much life insurance an owner needs
- Where can I read more about key person coverage?
Our key person and buy-sell funding page explains the coverages and how we place them.
- Key person and buy-sell funding
- How do I know whether I need a will, a trust or an attorney?
Take the Business Owner Plan Check. It asks about ten short questions about the business, your household and what you already have, then says whether most owners in your position set up a will or a living trust, or should see an attorney first, and estimates the life insurance in ranges with the arithmetic shown.
- Take the Plan Check
Set it up, then fund it
We set up wills and revocable living trusts through our online document platform, from $695 for a will and $1,495 for a trust, and we place the life insurance that pays into them. We do not draft operating, partnership or buy-sell agreements, and we do not give legal advice; when your situation needs an attorney, the Plan Check says so.
Boring Insurance Agency is a licensed insurance agency, not a law firm, and does not provide legal advice. No attorney-client relationship is created by using this service. These documents are self-help forms prepared from the information you provide. Laws vary by state, and your circumstances may require changes these forms do not make. We recommend you have an attorney licensed in your state review your documents before you sign them.
Written by Kevin Kelsey, founder and principal agent, CA License #6011822. Last updated 2026-10-05. See all guides.