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Benjamin Carr was a licensed insurance agent in Georgia and has two years' experience in life, health, property and casualty coverage. He has worked with State Farm and other risk management firms. He is also a strategic writer and editor with a background in branding, marketing, and quality assurance. He has been in military newsrooms — literally on the frontline of journalism.

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Reviewed by Benji Carr
Former Licensed Life Insurance Agent Benji Carr

UPDATED: Apr 21, 2022

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  • Key person life insurance, also known as key man life insurance, is a type of policy a company takes out on a key contributor
  • A key person policy is designed to protect a company and its employees from any financial losses associated with the death of a vital employee
  • Companies may be able to avoid bankruptcy by purchasing a key person insurance policy on one of the co-founders

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If you’ve ever wondered what key person life insurance is all about, you may be a bit surprised to learn more about the process.

A key person life insurance policy is a policy that a company takes out to insure the life of one of the company’s most important employees. Key man insurance — as it was formerly known — is intended to help the company recover from any losses associated with the death of a key contributor.

As you shop for life insurance coverage, you will not need to consider a key person policy unless you own a small business. You will still want to make sure you do your homework to find the perfect term or whole life insurance policy that works for you. This will help you avoid paying too much for coverage.

You can use our free quote tool above to find and compare cheap life insurance rates from some of the best companies in your area today.

What is a key person insurance policy?

While there is no ‘key personnel life Insurance company’ that strictly offers a key person policy, there are plenty of companies that can sell a policy to a business’s vital employee.

Since a key man insurance policy is designed to protect a company from losses once a key person dies or is disabled, the business is both the owner and the beneficiary. This is different from standard life insurance coverage in which the owner of the policy and the beneficiary of the policy are separate individuals.

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What types of life insurance can be a key person’s policies?

A business can use either a term life policy or a permanent life policy when purchasing key person coverage. 

Term life insurance, which covers an individual for a specific amount of time, is one option for key person’s life insurance. With a term key person life policy, the key individual would be covered for a specified term — typically anywhere from 10 to 30 years — and the policy’s death benefit would be paid out directly to the company if the individual passed away during the term.

With permanent life insurance, also known as whole life insurance, an individual is covered for the duration of their lifetime. Once the policyholder passes away, the policy’s death benefit is paid out to that individual’s beneficiaries.

In the case of a key person life insurance policy, the company would receive the death benefit of the whole life policy. Unlike a term life option, a permanent policy will never expire if the policyholder pays their premiums on time.

Why would a company need a key person policy?

If a business needs a loan, a key person life insurance policy may be required. Since small businesses are often dependent upon just one or two employees, the co-founders of many small businesses must purchase a key person policy to avoid going bankrupt. 

Key person life insurance  offers a financial cushion for companies. If the passing of one particular employee caused significant effects on the company’s profits, a key man policy would come in handy. This specifically applies when:

  • One specific employee is tied to the company’s brand.
  • An employee’s skill set is tied to a company’s performance or production.
  • The loss of a particular employee could cause a reduction in business.
  • The loss of a particular employee could destroy a company’s credit.

If a company is hyper-dependent on a particular employee, key person life insurance can be an alternative to declaring bankruptcy. The policy could help cover any outstanding debts and provide employee severance if necessary.

How much coverage do you need in a key person policy?

The amount of coverage you will need for a key person policy depends on the unique specifics of a company. Some of the more common methods companies use when determining the necessary level of key man insurance include:

  • Multiplication of compensation. The compensation of a company’s employees is multiplied by the number of years it will take to replace them.
  • Percentage of profits. The revenue is multiplied by the number of years it takes to replace an employee. This will depend on each specific company’s structure and annual profit.
  • Cost to replace. The cost of finding, hiring, and training a new individual to replace someone else who left. A company will likely lose money during this time frame, which should be included in the calculations.

As you determine the details of these calculations, you’ll find it’s possible to include raises, bonuses, and other assumed information into your final numbers. The more specific you can get about the coverage amount, the more protected your business will be. 

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How much is key person life insurance?

The cost of a key person policy is determined by the type of policy and coverage limit that the business purchases, along with the insured’s age, gender, and health status.

The table below shows the average monthly rates for a term life insurance policy based on age, gender, and the coverage amount.

Average Monthly 20-Year Term Life Insurance Rates by Age, Gender, and Coverage Value
Age and Gender$250,000 Policy Average Monthly Life Insurance Rates$500,000 Policy Average Monthly Life Insurance Rates$750,000 Policy Average Monthly Life Insurance Rates$1 Million Policy Average Monthly Life Insurance Rates$2 Million Policy Average Monthly Life Insurance Rates
20-Year-Old Male$18$29$40$47$86
20-Year-Old Female$15$22$30$35$64
25-Year-Old Male$17$28$39$46$86
25-Year-Old Female$15$22$30$35$65
30-Year-Old Male$18$29$40$47$89
30-Year-Old Female$15$23$31$37$69
35-Year-Old Male$19$31$44$52$99
35-Year-Old Female$17$26$36$43$79
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In comparison, the next table shows whole life insurance rates based on age, gender, and the coverage amount.

Whole Life Insurance Rates by Age, Gender, and Policy Limit
Age & Gender   $250K Policy Limit$500K Policy Limit$750K Policy Limit$1M Policy Limit$2M Policy Limit
25-Year-Old Female$156    $307    $458    $600      $1,196    
25-Year-Old Male  $178    $351    $524    $688      $1,179    
30-Year-Old Female$189    $374    $558    $733      $1,462    
30-Year-Old Male  $213    $421    $629    $827      $1,650    
35-Year-Old Female$219    $433    $647    $852      $1,699    
35-Year-Old Male  $261    $517    $773    $1,020    $2,035    
40-Year-Old Female$264    $523    $782    $1,032    $2,059    
40-Year-Old Male  $328    $652    $975    $1,289    $2,574    
45-Year-Old Female$329    $653    $978    $1,293    $2,581    
45-Year-Old Male  $416    $827    $1,239  $1,641    $3,277    
50-Year-Old Female$421    $837    $1,254  $1,661    $3,317    
50-Year-Old Male  $531    $1,057  $1,584  $2,101    $4,198    
55-Year-Old Female$544    $1,084  $1,623  $2,153    $4,302    
55-Year-Old Male  $678    $1,351  $2,024  $2,688    $5,372    
60-Year-Old Female$705    $1,406  $2,107  $2,799    $5,593    
60-Year-Old Male  $865    $1,725  $2,586  $3,437    $6,869    
65-Year-Old Female$935    $1,865  $2,796  $3,717    $7,429    
65-Year-Old Male  $1,123  $2,241  $3,360  $4,468    $8,932    
70-Year-Old Female$1,274  $2,544  $3,814  $5,074    $10,143   
70-Year-Old Male  $1,518  $3,031  $4,544  $6,047    $12,090   
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As you can see, monthly rates vary greatly based on various factors. The only way you’ll know how much your business will pay in monthly premiums is to shop around for specific quotes.

The Bottom Line

Ultimately, key person insurance helps alleviate periods of uncertainty and ensures a business can continue to operate both financially and culturally even if it loses one of its key employees.  However, if you’re a sole proprietor business owner who runs your business alone, you won’t need key person insurance.

The use of life insurance can be a great part of a cross-purchase strategy and can avert financial hardship in the event of the death of a key-employee.

Talking to an insurance agent who specializes in these kinds of policies can also be helpful.

Be sure to use our free quote tool below to find and compare key man life insurance rates from some of the best companies in your area today.