Free Educational Tool
How much key-person insurance should the business carry?
When a business depends on one person — a founder, a rainmaker, a technical lead whose departure would genuinely set the company back — key-person life insurance gives the business cash to absorb the shock: to recruit and ramp a replacement, to reassure lenders and customers, and to cover the earnings the company loses in the meantime. There is no single formula for the right amount, so this tool runs the three methods advisors actually use, side by side, and shows you the range they produce. Coverage need only — no premiums, no quotes. For a worked example of these three methods applied to one business, see a rainmaker, a lender, and an uninsured key-person gap.
Why there are three answers, not one
Key-person coverage answers a question with no exact number: what is it worth to the business to survive the loss of this person well? Because that value can be framed several legitimate ways, practitioners triangulate rather than pick a single formula.
The three ways to size it, and when each applies
The multiple-of-compensation method is the quick rule of thumb a lender or carrier will recognize — a multiple of the person's total compensation, typically in the range of five to ten times. The contribution-to-earnings method is more economic: it isolates the share of company profit fairly attributable to this person and capitalizes it over the years it would take the business to recover. The replacement-cost method is the most concrete: it adds up what the company would actually spend — recruiting and signing a successor, the lost productivity while they ramp, and the profit that erodes during the transition.
None of the three is "correct." They frame the same risk from different angles, and the useful output is the range between them. A figure that several methods converge on is easy to defend to a lender, a co-owner, or a board; a figure only one method produces deserves a second look. The point of this tool is to show you that range before any conversation about a specific policy — and to keep the discussion on the need, not on a product.
Run the three methods
The key person
All estimates. Nothing is sent anywhere — this runs entirely in your browser.
The basics
Used across all three methods. The person's name is optional and is only used to label the summary below.
Method one — Multiple of compensation
The rule of thumb a lender or carrier will recognize. Choose the multiple that reflects how central this person is; five is conservative, ten is aggressive.
Method two — Contribution to earnings
Capitalizes the share of company profit fairly attributable to this person over the recovery period above.
Method three — Cost to replace
What the company would actually spend to recruit, onboard, and absorb the transition. Add only the pieces that apply.
Estimated coverage range to consider
$0
Enter the figures above to run the three methods.
Multiple of compensation
$0
Compensation × multiple.
Contribution to earnings
$0
Attributable profit × recovery years.
Cost to replace
$0
Recruiting + lost profit + obligations.
| Lowest of the three methods | $0 |
| Highest of the three methods | $0 |
| Midpoint of the range | $0 |
| Where the methods converge | — |
A coverage amount that two or three methods land near is the easiest figure to justify to a lender, a co-owner, or a board. When the three diverge sharply, that usually means one input is doing a lot of work — the profit share or the recovery period most often — and it is worth revisiting before settling on a number.
Where this fits
Key-person coverage rarely stands alone
The same loss that triggers a key-person claim usually exposes two adjacent gaps.
The two adjacent gaps — and how to avoid over-insuring
If the key person is also an owner, the business needs a funded answer to what happens to their shares — that is buy-sell funding, a related but distinct calculation, and it lives in the partnership or shareholder agreement your attorney drafts. And if the company carries SBA or other lender debt tied to this individual, the lender may already require coverage as a loan condition; our SBA loan insurance calculator runs that test specifically.
Getting these three to work together — key-person protection, buy-sell funding, and any lender requirement — without over-insuring or duplicating coverage is the actual planning work. It is also where ownership and tax structure matter: who owns the policy, who pays the premium, and how proceeds are received all affect the result, and all sit at the intersection of your CPA's and attorney's work and ours. More on how we coordinate that is on the business owners page.
Already carrying a key-person policy?
Policies put in place years ago are often the wrong size for the business today, owned in a way that creates an avoidable tax result, or quietly lapsing. We review an existing policy in writing — what it covers, whether it still fits, and what it would cost to fix — at no fee.
How the second opinion works