Key Person Insurance Calculator
Key person cover value.
Calculate key person insurance cover from profit attributable, years of impact, discount rate, and replacement cost. Free and educational.
What this tool does
This calculator estimates the cover amount needed to protect a business against financial loss if a key person dies or becomes disabled. It combines two components: the present value of profit lost during a recovery or replacement period, and the direct costs of recruiting and training a successor. The result represents a lump sum figure that, if paid out, would offset both the earnings gap and transition expenses. The calculation is most sensitive to the annual profit tied to that person and the number of years before normal operations resume. For example, a business might model a scenario where a senior manager's absence would impact revenue for two years while a replacement is found and trained. The output assumes profit loss occurs linearly and does not account for other business interruption factors, insurance policy terms, or tax treatment. This is an educational illustration of financial exposure.
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Formula Used
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Disclaimer
Results are estimates for educational purposes only. They do not constitute financial advice. Consult a qualified professional before making financial decisions.
Key person insurance uses discounted cash flow to value lost profit from a critical employee plus replacement cost. Formula: sum of annual profit attribution discounted to present value, plus one-off replacement cost. Life insurance or critical illness cover sized at this total gives the business financial breathing room to recover.
3 years of profit at risk × 150,000/year profit attribution discounted at 5% = 408,454 PV. Plus 50,000 replacement cost (recruitment, training, transition) = 458,454 total cover needed. This sizes the key person policy for a founder or critical exec whose departure would hurt the business.
Key person insurance differs from life/family insurance. Company owns the policy, company receives payout, company uses funds to cover lost profit and fund replacement. Premiums usually tax-deductible; payouts usually treated as trading receipt (taxable). Legal structure matters - the tax authority has specific rules on deductibility.
Run it with sensible defaults
Using years of profit at risk of 3 years, annual profit attributable of 150,000, replacement cost of 50,000, discount rate of 5%, the calculation works out to 458,487.20. The defaults are meant as a starting point, not a recommendation.
The levers in this calculation
The inputs — Years of Profit at Risk, Annual Profit Attributable, Replacement Cost, and Discount Rate % — do not pull with equal force. Not every input has equal weight. Adjusting one input at a time toward extreme values shows which ones move the result most.
How the math works
PV = sum of annual profit ÷ (1 + r)^year. Total cover = PV + replacement cost.
Using this as a check-in
Re-run this every three months. A single reading tells you where you stand; four readings tell you whether things are improving. The trend matters more than any individual snapshot.
What this doesn't capture
The score is a composite of the inputs you provide. Life context — job security, family obligations, health, housing — doesn't appear in the math but shapes the real picture. Use the number as a prompt, not a verdict.
PV of ££150,000 × 3y at 5% + ££50,000 = 458,487.20.
Inputs
This example uses typical values for illustration. Adjust the inputs above to match a specific situation and see how the result changes.
Sources & Methodology
Methodology
This calculator computes the recommended cover value for key person insurance by combining two components. First, it calculates the present value of profit at risk by discounting each year's attributable profit back to today using the specified discount rate, then summing across all years at risk. This accounts for the time value of money—profit lost in future years is worth less in present terms than immediate losses. Second, it adds the one-time replacement cost, which represents expenses incurred in recruiting and training a successor. The model assumes a constant annual profit figure, a stable discount rate, and that profit loss occurs uniformly across the stated period. It does not account for tax effects, varying profit growth rates, changes in business circumstances, or the probability that the key person event may not occur.
References
Frequently Asked Questions
Who is a key person?
How to value profit attribution?
Tax treatment?
Differ from owner life insurance?
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