How much key person insurance coverage should my business have?

Determining the appropriate coverage amount requires careful analysis of your business's financial exposure and the key person's value. There are several calculation methods used in Australia. The Multiple of Income Method uses five to seven times the employee's annual salary, though in some cases up to 20 times salary may be justified depending on their position. The Replacement Cost Method calculates the total cost of recruiting, hiring, and training a replacement, including lost productivity during the transition. The Contributions to Earnings Method examines the key person's contribution to average net income over five years, multiplied by the number of years needed to train a replacement. The Proportion of Profits Method is more complex, considering the key person's salary, annual profit contribution, and replacement timeframe. Most Australian SME key person insurance payouts range between $500,000 to $2 million. Your coverage should also consider outstanding business debts, especially if lenders require key person insurance as a loan condition. It's recommended to review coverage amounts regularly as the business grows and the key person's value increases.