You have made the decision that key employee life insurance is something that your business should consider and now want to figure out how much coverage you really need and how much it will cost. However, there is no real black and white approach that is effective for every situation. Each business has its own unique circumstances that will ultimately define the amount of key person life insurance required. Below are a few of the more common ways of coming up with a correct amount of key employee insurance that will adequately protect your business.
How Much Will It Cost to Replace Your Key Employee?
With this approach, you need to identify everything that must be done to replace the key person and assess a cost to it. In other words, how much will it cost to locate, recruit and train a person that can do the job profitably? What about short term revenue shortages that result from the loss of the key employee? Maybe there are projects or contracts or HUGE deals that become lost opportunities. It may take a little time to think this through but your business will be better off for taking the time to do it.
How Much of a Contribution to Overall Revenue and Profits?
What amount of revenue and profit is a direct result of the efforts of your key person? Or, what would be the impact to the company’s earnings in the event of the death of the key employee? Your CPA is a good person to review this information and determine an employee’s contribution to earnings.
Just Apply for 5X the Key Employees Income?
In many cases, it may be just as simple (and effective) to use multiples of the key person’s income to determine the amount of coverage. For example, if your key person is a programmer that earns $100,000 annually, you may decide that 5X his salary or $500,000 of life insurance would be plenty. Insurance companies are ok with this approach up to 10X a key employee’s income. Generally speaking, the 10X income figure represents the ceiling for a non-owner key employee. In other words, to get more than 10X a key employee’s salary, he or she must be an owner in the business. This approach is by far the easiest way to estimate the potential loss to the business and allows for some flexibility as well.
Summary
There is no exact science to determine the correct amount of key employee life insurance for your business. The best approach may be a combination of the three methods: replacement costs for a key employee, contribution to earnings and the multiples of income approach. The main thing is to get covered. As circumstances change you can reduce or add to your policy amount. Don’t wait! Call NOW at toll free 877-583-3955 for your free no obligation key employee life insurance quote.