There is no single formula for how to calculate key person insurance: insurers describe several rules of thumb, and the right one depends on what losing the person would cost the business. The methods below come from Royal London's and Legal & General's guides, which are written for financial advisers, and are set out as their guidance, not a rule every insurer applies.

Checking a sum against your company's numbers? A broker holding FCA authorisation will go over the working by phone, free, by way of the form on this page.

What should a key person cover amount reflect?

Legal & General's key person guide (June 2026) says that, when calculating the appropriate amount of cover, you "should consider the effect of the loss of the key person on the business including whether this would directly impact on the profits, and what the cost of hiring a replacement might be." Its list of losses to the business includes lost profits, having to recruit or train a replacement, and outstanding loans.

Royal London's guidance (September 2025) is blunter: it sets no fixed rule for valuing a key person, only that insurable interest must be demonstrated. Legal & General's page for business customers puts that plainly: the business must be able to show it would suffer a financial loss of profits in the person's absence.

So the calculation starts with the business, not the person's pay slip: what would stop earning, what would it cost to fill the gap, and what is owed that depends on them. Ownership of the policy is on who owns key person insurance.

Which methods do insurers use to work out key person cover?

Between them the two guides describe four main approaches, with special cases in the questions at the end. Royal London presents its methods as ways to assess "a reasonable amount of cover"; none is a fixed rule.

MethodHow the guide puts itWhose guide
Multiple of profitNet profit times a multiple; Royal London gives "5 x net profit" as the normal multiple. Legal & General lists "up to 2 x" the share of gross profit, or "up to 5 x" the share of net profit, attributable to the key person.Royal London; Legal & General
Contribution to profit through payrollKey person's salary divided by the business's total payroll, times gross profit, times a recovery period of "max five years".Legal & General
Multiple of salary or earningsUp to 10 times for life cover, with a lower multiple for critical illness. Royal London's critical illness figure is up to 5 times gross salary.Legal & General; Royal London
Loan coverThe amount of the loan to be repaid if the key person dies.Legal & General; Royal London

Legal & General suggests an order for the decisions: the length of cover first, then the risks to insure against, then the amount, then affordability and finally tax. Whichever method fits, the inputs are figures from the business's own accounts.

How does the profit method work?

Royal London treats a multiple of profits as the main way to value a key person: the cover exists to protect the business's profitability, so considering profit is usually the first step. Where there is more than one key person, it says the profit "may need to be split" and would be apportioned according to contribution. It adds that higher multiples may be justified for a rapidly expanding business.

Legal & General's profit formulas rest on the share of profit "directly attributable to key person", which is the harder number to arrive at, and it says an average of the last two years' profit figures would routinely be used in all of them. Its third formula skips that step: the key person's salary as a share of the total payroll is applied to gross profit, then multiplied by a recovery period of no more than five years.

When does a multiple of salary or earnings make sense?

Legal & General describes the earnings multiple as taking account of the cost of replacing a key individual, normally including the cost of finding a suitable person, the expense of required training and their earnings while they develop in the role. Royal London's version uses gross salary including benefits in kind and says the figure can be a useful guide to the amount needed to bring in a replacement.

The same guidance names the weak spot: for a shareholding employee, pay may say little about what the person is worth to the business. A director who takes a low salary and a dividend can look cheap to replace on paper while being central to profit. It says its "proportion of salary roll" method can be distorted in the same way, or by a director taking a relatively high salary.

A multiple that is right for life cover is not automatically right for critical illness: both guides point to a lower multiple for critical illness. Whether to add it is covered on critical illness cover for business.

How do you set key person cover against a business loan?

Where the aim is to clear a debt, the sum is simpler: Royal London says the outstanding loan "will need to be covered", divided between the relevant key people as appropriate. Tax can differ from cover for lost profit; see whether key person insurance is tax deductible.

Is there a key person insurance calculator?

Yes, though the key man insurance calculators insurers mention sit in adviser material. Legal & General says it can offer assistance in calculating the amount of cover with its key person calculator "available on our adviser centre", and Royal London's business protection guide says it has a business protection calculator that can be used to assess clients' needs.

Because those tools sit with advisers, a broker is the practical way to run one for your company, and can say which basis suits your set-up.

What will an insurer ask to support the amount?

The amount you choose has to be explainable. Aviva's financial questionnaire (August 2026, an adviser-channel form) asks why the business chose that level of cover and term, the estimated financial impact of the key person's death on the business, the likely cost of replacing their role, any succession plan, and whether the business already holds or plans cover on other key people. Legal & General's underwriting limits guide (October 2025, adviser literature) lists last year's profit among the simplified financial information for business loan or key person protection at one level of cover, and lists the last two years' reports and accounts among the requirements for business protection applications at higher levels of cover.

Expect to show your accounts. Which number an insurer would want for your company is something a broker can explain at no charge, before you apply.

Frequently asked questions

Is the sum worked out differently for a start-up or a buyout?

Royal London treats these as special circumstances. For a start-up, the working capital at risk is calculated together with the key person's share of that risk; for a management buyout, the amount at risk if the key person is lost is calculated, as with a loan; where venture capital is raised, the capital invested is calculated and covered as appropriate.

Can two directors each be covered for the full loan?

Royal London says that where there are multiple applications for directors in the same company it may be possible to allow cover for 100% of the commercial loan on each life, and that limits may apply. How an insurer would treat your loan is something the broker can check for you.

What does the cover cost once the amount is chosen?

The calculation sets the sum insured, not the premium; the price comes from a quote for the named person. The cost factors are set out on how much key person insurance costs, and sole traders and partners can read key man insurance for sole traders.

Once you have a figure, send the form on this page to book a ring-back that sets it against what insurers require. The wider group of cover is in the business protection guide.

Sources