Key person cover value.

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. Nudge the inputs toward your own situation and the output recalculates instantly. 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. Flip one at a time toward extreme values to feel which ones move the needle most for your situation.

How the math works

PV = sum of annual profit ÷ (1 + r)^year. Total cover = PV + replacement cost. The working is transparent — you can verify every step yourself in the formula section below. No black box, no opaque "proprietary model".

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.