Key facts: The two standard sizing methods: salary multiple (commonly 5–10× the key person's package) and profit-based (typically 2× gross profit or 5× net profit attributable to them, across a 2-year recovery). Add debts they guarantee — lenders often require exactly this. Cover the recovery period honestly: replacing a genuine key person takes 1–2 years, not months.
Size from what the payout must do
The lump sum has jobs: replace profit the person drives while the business adapts; fund recruitment (search fees, premium salary, overlap); steady nerves among lenders, suppliers and clients; and clear borrowing that dies or accelerates with them. List the jobs for your key person first — the methods below are just structured ways of adding them up. (For what the cover is and who counts as key, see the key person guide.)
The two methods, worked
Salary multiple: quick and insurer-friendly — a £90,000 sales director at 7× suggests £630,000. Best for senior employees whose package approximates their economic weight. Profit-based: sharper for founders and rainmakers whose salary understates reality — attribute profit honestly (the person drives 60% of a £400,000 gross profit → £240,000; at 2× for a two-year recovery → ~£480,000). Where the methods disagree wildly, the profit method is usually telling the truth — founder salaries are tax choices, not value measures.
The debt layer
Separately cover borrowing that the person's death would trigger or strand: directors' loans, personally-guaranteed facilities, key-person clauses in funding agreements. Lenders increasingly require assignment of a policy matching the facility — check covenants before an insurer, or worse a bank, checks them for you. This layer stacks on top of the trading-loss layer; don't net them.
Term, reviews and the tax angle
Term follows exposure: the loan's length for debt cover; for trading cover, a rolling 5-year term with review beats decades of guesswork — key people change roles, businesses change shape. Add critical illness where a long recovery would hurt as much as a death (statistically likelier during working years). Premium/payout tax treatment follows the policy's purpose — the guide covers the principles; take advice on your structure.
Pricing your figure
A protection specialist will pressure-test the sizing, structure ownership and any lender assignment, and place the cover competitively. Find a protection specialist through Nesto — free, no obligation.
Frequently asked questions
What's the standard multiple for key person cover?
5–10× salary, or profit-based: ~2× attributable gross profit / 5× net — whichever better reflects the person's real economic weight.
Should loans be included in the sum?
Yes, as a separate layer — guaranteed debts and key-person covenants need covering on top of trading losses, and lenders may require policy assignment.
How long should the term be?
Match debt cover to the loan; for trading cover, a reviewable ~5-year term keeps sizing honest as roles and profits evolve.
Is critical illness worth adding?
Usually — serious illness of a key person is more likely than death during working years, with similar business impact.