Key Man Insurance Cost: Average Rates & What Drives Them

Key man insurance, also called key person insurance, is a policy a business buys on the life of someone it cannot easily replace, such as a founder, a top salesperson, or a partner. The business pays the premium and, in the usual setup, collects the benefit. The money gives the company time to recruit a replacement or repay debts.

There is no separate rate card for it. In practice, key person cover is most often a standard life policy, and it is priced like one. That is why the figures below are life insurance premiums for the person being insured. The business pays them, but the insured person's age, sex, and health set the price.

Term policies are the common choice because they cover a fixed stretch of years at a low price. MoneyGeek publishes average monthly premiums for nonsmokers in average health on a 20-year policy at the benefit size shown in the table heading. Each row shows women first and men second.

Premiums climb slowly through the thirties and forties, then jump. A 60-year-old key person costs several times what a 40-year-old costs, because the insurer's risk of paying out rises steeply with age. If your key employee is already in their fifties or sixties, expect a premium that is a larger share of the budget and a longer underwriting process.

The size of the policy is the other major driver. The same MoneyGeek analysis shows how premiums change at age 40 as the death benefit goes up.

Doubling the death benefit does not double the premium in these figures. Even so, going from $47 – $59/mo to $86 – $109/mo adds a meaningful amount to the monthly bill. Coverage amounts for key people are usually tied to what the business would lose, such as the replacement cost, lost profit, or debts that must be repaid. A licensed insurance agent, broker, or financial adviser can help you size a policy.

A business that wants coverage that never expires may look at whole life instead. At age 40 with the same benefit, MoneyGeek's average premium runs $540 – $574/mo, many times the term premium of $47 – $59/mo for the same age and amount. Permanent policies build cash value and last for life, which is why some businesses accept the higher cost. Term is simpler and cheaper when the need runs for a limited number of years.

Not every key person policy is life insurance. NerdWallet describes a Chubb policy aimed at young companies that pays a monthly benefit if the key person is disabled, and it says premiums start as low as $20/mo. That is a disability product with a different trigger and a different benefit, so it should not be compared directly with the life premiums above. Check the policy's definitions, limits, and the length of time it pays.

The two sources below describe the same case, a 40-year-old buying 20-year term cover at the same benefit amount, and still do not agree.

MoneyGeek reports $47 – $59/mo, depending on the sex of the insured, and it models nonsmokers in average health. NerdWallet reports $26/mo, which it attributes to Policygenius, for a healthy 40-year-old. A healthier risk class costs less, and a model that mixes health classes costs more. Carriers also price differently, and the cheapest company will be below the average. Neither number is a quote for your key person.

• Age. The most important factor, as the table shows.
• Sex. Women generally pay less than men at the same age in these figures.
• Health and tobacco use. Underwriting looks at medical history, and smokers pay much more than nonsmokers.
• Coverage amount and term length. A larger benefit or a longer term costs more.
• Policy type. Term, whole life, and other permanent policies are priced very differently.
• Occupation and lifestyle. Risky jobs or hobbies may raise the rate.

Each key person needs a separate policy, so a business with three people to protect should budget for three premiums.

Ask who owns the policy and who is the beneficiary. Ask whether the term will outlast the period the business depends on the person. Ask what happens if the person leaves the company, and whether the policy can be transferred or converted. Ask a tax professional how premiums and benefits are treated in your situation, since the answer depends on the structure of your business and the policy.