How Much Key Person Coverage Does Your Business Need?

“How much key person insurance do I need?” sounds like a homework question with one right answer.

It isn’t.

The right amount is the amount that keeps the business standing if that person doesn’t show up Monday. Not a round number that felt good in a meeting. Not whatever the bank casually mentioned once. A number tied to what actually breaks.

I’m Harvey Baker Jr., a licensed Texas agent in McKinney. Here’s how owners size key person coverage in plain English — and the mistakes that leave the company underinsured when it matters.

What key person coverage is for

Key person coverage is a life insurance policy the business owns on someone it can’t easily replace.

• The business owns the policy.

• The business pays the premium.

• The business is the beneficiary.

If that person dies, the money goes to the company — to cover a revenue dip, recruit and train a replacement, steady lenders and vendors, pay down debt, or buy time to decide what comes next.

It does not replace the person. It buys options. Some owners also look at key person disability coverage; availability and eligibility vary.

This is different from buy-sell funding, which pays for an owner’s share under a written agreement. You may need both. Different jobs. Different policies.

Rough ways owners size it

I will not invent dollar “facts” or universal formulas here. Coverage, eligibility, and rates vary by carrier and health. These are the lenses owners actually use — often more than one, then picking the higher realistic number they can sustain.

1. Revenue impact

Ask: How much revenue walks out the door if this person is gone?

If one estimator wins most bids, or one rainmaker owns the top accounts, the hit is not abstract. Owners often look at a share of revenue or gross profit tied to that person, then decide how many months of that hit to absorb with cash instead of panic.

The point is not penny precision. It is honesty about concentration risk.

2. Replacement cost

Ask: What does it cost to find, hire, and ramp someone who can do this job?

Include recruiter fees, higher short-term pay, training time, lost productivity while the seat is empty, and ramp-up mistakes. Replacement is rarely “post the job and move on.” In DFW trades, professional services, and owner-operated shops, it often takes longer than anyone wants to admit.

3. Debt and loan protection

Ask: What obligations get shaky if this person is gone?

Lines of credit, equipment loans, bonding, and personal guarantees often assume a specific person is still running the place. Some owners size coverage partly to pay down or reassure around those obligations so the family and remaining team aren’t negotiating from weakness.

If your name is on a personal guarantee, that is a clue — not a full answer by itself.

4. Continuity runway

Ask: How many months of overhead do we want covered while we stabilize?

Payroll, rent, insurance, software, trucks, and the quiet costs that don’t pause for grief. Runway thinking is simple: give the business time to keep promises without a fire sale.

Owners who hate drama usually prefer more runway over a thinner policy that looks cheaper today.

Putting the lenses together

A practical approach:

1. Estimate the revenue hit and how long it might last.

2. Add a realistic replacement budget.

3. Note debt or guarantee exposure that would need cash or calm.

4. Decide how many months of overhead you want as runway.

5. Compare that total to what premium the business can keep paying.

Then talk through it with your CPA and, if you have partners, with them. The number should survive daylight, not just a sales meeting.

Hypothetical example for illustration only: Picture a Plano specialty contractor. One project manager carries relationships that drive a big share of yearly work. The owner walks through revenue concentration, a months-long replacement search, an equipment line that still needs a signature, and several months of overhead as runway. The “right” amount isn’t a round guess from a brochure. It’s those honest inputs — then checked against what the company can sustain.

Common mistakes

• Picking a round number because it sounds serious. A round number without a method is theater.

• Covering only the owner and ignoring the real rainmaker. Sometimes the key person isn’t the founder. It’s the estimator, the producer, or the ops lead.

• Confusing key person coverage with a buy-sell. One protects the business from lost contribution. The other funds a share purchase. Mixing them up leaves a gap.

• Sizing to premium comfort alone. Budget matters. Blind under-sizing leaves the company exposed on the worst Monday.

• Never updating the amount. The business grew, the debt changed, or the key person changed — and the policy didn’t.

• Forgetting who owns the policy. If the company should receive the money, the company should own the policy and be the beneficiary.

• Assuming group life at work is enough. Group coverage is often modest and not designed as a business continuity tool.

Questions to ask before you choose an amount

• Who are our actual key people — by impact, not by title?

• What share of revenue or relationships sits with each one?

• What would a real replacement cost, and how long would ramp-up take?

• What debt, bonding, or personal guarantees assume this person is still here?

• How many months of overhead do we want as runway?

• Does our CPA see any tax or entity issues with company-owned coverage?

• If we have a buy-sell, does that agreement already use different policies for a different job?

• Can we keep this premium through a slow season?

Coverage, eligibility, and rates vary by carrier and health. Cheap is a price. Right is a fit.

Get your Gap Map (free, 20 minutes)

If you want a clean starting point, I built a one-page Gap Map: where your home, your business, and your exit still depend on one person. Three columns. Plain English. You keep it either way, whether you buy anything or not.

Call or text 430-373-7752 with the word MAP for a free one-page Gap Map. Or learn more at bakerlegacypartners.com.

Built by you. Protected without you.

Insurance products involve costs, limitations, exclusions, and suitability considerations. This article is educational and is not tax, legal, or financial advice.

Harvey Baker Jr., Licensed Texas Life, Accident & Health Agent, TX License #3470534. Coverage, eligibility, and rates vary by carrier and health.