How To Calculate Key Employee Insurance Coverage

Written by KPI

 Key Person Definition

Simply put, a key employee or key person is someone who is vital to your company and not easily replaceable. Key person insurance is there to protect the business from the sudden, unexpected loss of your key employee. There are many scenarios where key employee life insurance is an integral piece of the puzzle, be it business continuation, a buy-sell agreement, SBA loan protection, and so much more…

The point is that identifying the need for key employee insurance is easy. What can be tricky is identifying how much you need. That’s where our handy-dandy key person insurance calculator comes in.

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How Our Key Man Calculator Gets You Results

Let’s get one thing out of the way quickly – key employee, key person, and key man all virtually mean the same thing. Here at, we are preferential to ‘key person,’ but when it comes to making accurate calculations splitting hairs has its benefits. As we discuss the different key man valuation methods below, we will make a simple distinction between two of our variables:

  • Key Employee – a non-owner, zero equity employee. (Example: top salesman)
  • Key Person – an owner or shareholder with equity. (Example: founder or CEO)
  • Key Man – all of the above

The key man calculator you see before you (on the left) generates live calculations based on the information you provide. We understand that businesses often have multiple key people, so we made sure that you could quickly run multiple calculations without any headache. Below, you will find helpful step-by-step definitions and considerations for how to get the most accurate estimation for your key employee and key person coverage.

Step One: Define Their Role

You have two options: Employee Only and Owner/Shareholder. This is a simple but integral aspect of the calculation. If the individual you are seeking coverage for has equity in the company, then you’ll have to account for the price of their equity and involvement in the business.

Step Two: Replacement Difficulty

This is really where the “estimate” in our calculation estimate comes to roost. None of us have a crystal ball, so the best anyone can do is not over-complicate the unknown. Every key man is going to be difficult to replace; that’s what makes them key. But if you have a top salesman who has deep relationships with your biggest clients or an engineer who can do what only a handful of others can, then that will be very difficult.

  • How Difficult Will It Be To Replace Your Key Person?
  • How Difficult Will It Be To Hire And Train A Replacement To 100% Efficiency?

When answering these two questions, it is important to consider the reality your business will be in if you lost this person. What would need to happen in order to get the company back on track? Would the company even be able to continue its operations if this key employee is gone tomorrow? Would your investors back out? These are very nuanced questions with much deeper considerations. But nobody wants to write an essay into a calculator between meetings. Our key man calculator accounts for these complexities by providing a range rather than a single value.

Step Three: Financial Data

It’s all number-crunching from here on out. If you’re a business owner or an employee tasked with putting this information together, then we probably don’t need to tell you what these data inputs are. However, you may want to incorporate future estimates as well. For instance, if your key employee currently makes $80,000 annually but they are likely to get a raise in the near future, you probably want to include that here. Benefits like bonuses, sales incentives, etc., all of this should be added to the total annual income.

Finally, if you are seeking coverage for a business owner, the total debt should be for the company as a whole. Our calculator will use this to estimate the owner’s obligation to that debt.

Range Definitions

Our calculator offers a range rather than a single value because every situation is unique. A tech company and a car dealership could very well perform exactly the same financially, but the operation and the people that make it happen will have vastly different key person considerations.

Our minimum and maximum coverage amounts are based on industry guidelines that the majority of insurance companies follow. The minimum is what you need in order to not under-insure your key employee, while the maximum is the most coverage a carrier will likely allow. Finally, our recommended amount is a careful estimate based on all of the values you provide.

Feel free to make adjustments and dream a little. You now have an excellent estimate of how much coverage your business should acquire on its key people. The next step is to find out how much it costs. Luckily, our instant quoter is one click away.

Methods for Valuing Key Employee Coverage

Like anything in life, the goal for key person valuation should be to determine the right amount of coverage – no more, no less. This is why we take the needs-based approach to calculate the amount of life insurance needed based on the unique needs of the business, such as covering the amount of revenue your key employee brings in. There can be a huge difference between what you can get and what you actually need.

For example, let’s say your business is borrowing $10 million for a project expansion. That doesn’t mean an insurance company will willingly write a $10 million policy on your CEO – and even if they are willing to write it, that doesn’t necessarily mean that you should accept it. Specific details are required to justify the insurance amount requested:

  • How much of the company does your CEO own?
  • How much of the $10 million loan is tied to the CEO’s equity?
  • What is the annual income of your CEO?
  • How difficult would it be to find someone else who can do what they do?
  • How much revenue is at risk if the CEO is gone tomorrow?

These questions are the framework to pinpoint the amount of coverage the company should secure on their CEO or any key employee. Business continuation is a nuanced equation. There is no one policy-fits-all, which is why we utilize three different methods for analyzing key person insurance coverage.

Method One: Multiples of Income

The multiples of income method is the simplest and most common form of determining the value of a key employee:

7x Annual Income of Key Employee

Most insurance companies use the multiples of income method as a general guideline. Of course, depending on the specifics of the position, higher multiples may be justified as much as 20 times the current salary, including bonuses or benefits. So, while the justifications may be complex, the math couldn’t be simpler. For example, using the multiples of income method, an executive making $200,000 in compensation and benefits should reasonably be covered at $1.4 million of key man insurance at minimum. Typically, this method of valuation is used for non-equity key employees.

Method Two: Replacement Cost

The replacement cost method determines key person coverage based on what it could cost to replace your executive. Replacement cost is determined by salary, as well as expected costs required to hire, train, and completely replace the key person to 100% efficiency. Our calculator factors this in with your choice of “difficult” or “very difficult to replace” because if it was easy to replace your key employee… well, they might not actually be that key.

Method Three: Contributions to Revenue

The contributions to earnings method is calculated based on the estimated percentage of your key employee or key person’s contribution to the company’s bottom line. For example, a top salesperson in a small business may contribute 50% or more of the sales of the company directly resulting in half of the company’s profits. In this case, it is vital that your top salesman’s revenue contribution is factored into your key person coverage. After all, if you lose your salesman, you lose your sales.

Two Key Distinctions

The key person valuation methods discussed above are not set in stone. Each case merits specific considerations, which is why we always dig deeper into individual circumstances. Whether they are an employee only or own shares of the company is one aspect. A business owner valuation requires additional information, including the fair market value of the business as well as any outstanding debt.

If your business is in the start-up phase, our calculator will not be much help to you. The reason for this is because start-ups require a deeper analysis that isn’t strictly financial since there typically isn’t much financial record to go on. If your company is in the start-up phase and you need to insure your key people, whether it’s for an SBA loan or simply to protect the foundation of your new company, the next right step is to speak with an expert. Book your free consultation today.


We work with individuals across the nation to secure the best life insurance rates.

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