Estimator
If one person could not work tomorrow, what would it cost?
Key person coverage buys a business time. This estimator sizes it two standard ways, so you can see the range before any conversation about products.
If one person in your business could not work tomorrow, what would it cost, and for how long? Key person coverage exists to buy the business time: time to recruit, time to train, time for clients to settle. This estimator runs the two standard ways of sizing that coverage, side by side, so you can see the range owners usually plan inside.
Two methods, one planning range
| Method A, earnings multiple: 5 times compensation | |
| Method A, earnings multiple: 10 times compensation | |
| Method B, lost profit: revenue at risk, times margin, times recovery years | |
| Planning range to discuss |
Neither method is a needs analysis. They are the starting range. The real figure depends on how concentrated the dependency is, what debt the business carries, and whether the coverage is meant to protect the business only or also fund a buyout of the person's shares. One fact worth knowing early: when the corporation owns the policy and is the beneficiary, the premiums are generally not a deductible business expense, and that is normal. The benefit arrives tax free to the corporation, which is the trade the structure makes.
Want this estimate emailed, and a follow up?
Leave your details and Sean will follow up personally on where the dependency in your business really sits, and what owners usually do about it.
Reach out during working hours (9:00 AM to 9:00 PM Eastern) and you will hear from Sean within 2 hours. Reach out after hours and you will hear from Sean within 2 hours of the next working period.
Methodology and assumptions
Method A, earnings multiple. A long standing planning rule of thumb sizes key person coverage at 5 to 10 times the person's annual compensation. It is quick and easy to explain, and it tends to understate the exposure when the person carries client relationships or revenue well beyond their pay.
Method B, lost profit. Revenue influenced, multiplied by gross margin, multiplied by the years a replacement needs to reach full productivity. This estimates the profit the business would lose while it recovers, which is the actual hole coverage is usually bought to fill. It does not include recruiting fees, signing costs, the salary overlap of paying a replacement while revenue is still down, or the cost of mistakes during the transition.
What is not modelled, stated plainly: debt covenants that coverage may need to satisfy; buy sell funding, which is a separate calculation with its own checker on this site; disability and critical illness interruption, which are different risks from death and usually the more likely ones; and the difference between term and permanent coverage for this purpose, which is a horizon and budget conversation. Figures are educational estimates only, not financial advice and not an insurance recommendation.
Sources: standard key person planning practice as described in Canadian insurance planning literature; general corporate tax treatment of corporately owned life insurance premiums and benefits under the Income Tax Act, described in plain language. Confirm any structure with your accountant before it is put in place.
You do not have to sort this out on your own.
You don't have to figure this out alone. I'm here to help you through every step.
Reach out during working hours (9:00 AM to 9:00 PM Eastern) and you will hear from Sean within 2 hours. Reach out after hours and you will hear from Sean within 2 hours of the next working period.