Worked example: a rainmaker, a lender, and an uninsured key-person gap

Illustrative scenario. This is a hypothetical example constructed to demonstrate our analytical process. It does not describe an actual client engagement. All figures are illustrative, not quotes or projections. Tax points are general in nature; the loss quantification and tax treatment are your CPA's work. Nothing here is a recommendation for any individual.

The situation

Meridian (hypothetical) is a specialty commercial-services firm doing about $14 million in annual revenue. Profitable, closely held, a bank line it draws on seasonally. On paper it looks like a company, but a lot of it is really one person: the VP of Sales, who personally holds the three largest accounts — together close to 45% of revenue — and whose relationships are the reason those accounts renew.

The owner came to us for something else entirely. The key-person question surfaced by accident, when we asked what would happen to the numbers if that one person left tomorrow. The honest answer was: a lot, and nothing behind it. The exposure was completely uninsured, and the bank — quietly — was counting on that same person to keep the line performing.

Finding one: size the exposure, and do it three ways

Sizing a key person is not guesswork, but there is also no single right number. Three methods are used in practice, and running all three is the point — each captures a different truth, and together they bracket a defensible range rather than a single guess.

Method	What it captures	Illustrative
Multiple of compensation	The quick benchmark a lender or carrier recognizes — here, 8× total compensation of $320K	$2.6M
Contribution to earnings	The profit fairly attributable to this person (≈ $950K/yr), capitalized over the ~3 years it would take to recover	$2.85M
Replacement & ramp	Recruiting and signing a successor, lost productivity while they ramp, and profit that erodes during the transition	$2.2M
Defensible range	The band the coverage is sized within, then validated with the CPA	$2.2M–$2.85M

The three don't have to agree exactly, and here they don't. What they do is turn "we'd be in trouble" into a number the owner, the CPA, and the lender can all point at. Coverage was sized inside that band; the CPA validated the earnings-attribution figure, which is the one most open to argument.

Finding two: two facts the owner needed up front

The premiums are not deductible

As a general matter, key-person premiums are paid with after-tax dollars — the business does not deduct them. Owners almost always ask, so it is better said early than discovered later. The death benefit, correctly structured, is generally received income-tax-free, which is the other half of that trade.

One policy can do two jobs

The same coverage that protects the business if the person is gone can double as a retention tool if they stay — the cash value can anchor an arrangement that rewards the person for staying. Protection today, golden handcuffs tomorrow, from one structure.

The angle the lender cared about

For the bank, this was never an insurance question — it was a covenant question. A line of credit that depends on a borrower whose revenue rides on one uninsured person is carrying a risk the covenant did not name. Putting key-person coverage behind that person doesn't just protect the company; it makes the credit look the way the lender wishes it already did. That is why key-person coverage is often something a banker is quietly glad to see a borrower put in place.

Whose job is which The CPA quantifies the loss and confirms the tax treatment. We size the coverage the three ways above, structure it, and handle the insurance funding — including the notice-and-consent paperwork that applies when a company owns a policy on an employee. The screen that starts it all is one question: whose exit would move this client's numbers, and is there anything behind that person?

Run the three methods on your business

The key-person needs calculator →

Enter compensation, earnings attribution, and replacement cost, and see the three methods side by side with the range they produce. Coverage need only — no premiums, no quotes, no email required.

What the client receives

Every engagement produces a written analysis memo: the exposure sized three ways, the assumptions behind each, carrier-agnostic design specifications, and the funding structure including any notice-and-consent steps. Carrier selection happens afterward, compared on the merits. The memo is the deliverable; the policy is its implementation.

Why we publish worked examples instead of testimonials

You can't evaluate an advisor by adjectives. You can evaluate one by reasoning. This page shows the reasoning — the same three methods, applied to your business and coordinated with your CPA, are what an engagement looks like.

This scenario is hypothetical and for educational purposes only. All figures are illustrative and will differ based on individual circumstances and underwriting. Tax discussion is general in nature; the deductibility of premiums and the treatment of proceeds depend on facts and structure and are your CPA's to confirm. Insurance products are subject to underwriting approval. LogicPoint Advisors does not provide investment, tax, or legal advice. Cosmin Mandachescu · FL 2-15 License #G335891.

Revenue riding on one person, with nothing behind them? Start with a second opinion.

A first conversation is exploratory and at no cost. We will size the exposure the same three ways this page walks through Meridian's, and coordinate the tax treatment with your CPA.

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