How do I determine the right coverage amount for key person life insurance?

Determining the right key person insurance amount involves estimating the financial impact the key person's death would have on the business. There is no one-size-fits-all formula, but several common approaches guide the calculation.

Approach 1 — multiple of compensation: the most straightforward method. Multiply the key person's annual compensation (salary plus bonuses, benefits, and total cost to employ) by the number of years it would take to recruit, hire, and bring a replacement up to the key person's productivity level — typically 3–5 years. A key person earning $200,000/year with a 5-year replacement window suggests $1,000,000 in coverage.

Approach 2 — percentage of revenue: if the key person is primarily responsible for a significant portion of revenue, use the annual revenue they generate multiplied by the expected disruption period. A salesperson driving $2,000,000 in annual revenue might justify 2–3 years of that revenue in coverage.

Approach 3 — lender or investor requirements: if lenders or investors have specified a coverage amount as a condition of financing or investment, that amount establishes a minimum floor.

Approach 4 — specific financial obligations: if the key person's departure would trigger specific financial obligations (loan guarantees, contract performance bonds, severance agreements), the coverage should be sufficient to meet those obligations.

Nevada business owners should work with both a business advisor (for financial impact analysis) and an agent in our network (for coverage implementation from A-rated (A.M. Best) carriers). Actual amounts vary by business.