Salary or Revenue: Which Should Set Your Key Person Coverage?

Written by Hannah McCullough Insurance Researcher & Writer

Key person coverage based on salary or company revenue is a common question for owners who want to protect their business. The short answer: there is no single rule that says “use salary” or “use revenue.” The right amount depends on what the company would lose if that person were gone.

Who owns key person coverage?

The business owns the policy, pays the premiums, and is the beneficiary. That structure is what makes it key person insurance rather than personal life insurance. The insured person is the key employee, but the company receives the death benefit.

Because the business is the beneficiary, the coverage amount should match the company’s financial exposure. That exposure can come from lost revenue, the cost of replacing the person, or the disruption of operations.

Should the amount follow salary or revenue?

Salary is a starting point, not the whole answer. A key person’s value to the business often exceeds their paycheck. If a sales leader brings in a large share of revenue, the loss is bigger than their salary alone. Some owners prefer profit based sizing versus salary or revenue, replacing lost profit over several years instead.

Revenue can also be a useful reference, especially when the person’s contribution is tied to sales or client relationships. But revenue is not a perfect measure either. A company with thin margins may feel a revenue loss more sharply than one with strong reserves. When basing business coverage on revenue, it helps to see how that differs from sizing coverage by replacement costs.

The practical approach is to estimate the financial loss the business would face. That includes lost profit, replacement and training costs, and any slowdown in operations while the company recovers. When owners compare calculation methods, salary versus revenue for coverage is one starting point rather than a fixed rule.

What does the coverage protect against?

Key person insurance is intended to protect a business against financial loss caused by a key person’s death or long-term disability. That is the core purpose, according to the Idaho Business Portal.

The loss can be direct, such as lost sales, or indirect, such as a stalled project or a damaged client relationship. The policy gives the company cash to manage that disruption.

How does it fit with a buy-sell agreement?

Key person coverage may also be used as part of a buy-sell agreement when a business has multiple owners, according to the Idaho Business Portal. In that setup, the policy can fund the purchase of an owner’s interest after death.

This is where the question of key person vs buy sell coverage becomes important. Key person insurance protects the business from a financial loss. A buy-sell agreement uses life insurance to transfer ownership smoothly. They can work together, but they serve different purposes. Whether to carry key person and buy-sell coverage together is a separate decision, and many businesses use both.

Can lenders require it?

Banks or government loan programs may require key person insurance in some circumstances. The New York State Department of Financial Services notes that this type of policy is frequently required by lenders.

If a lender requires it, the coverage amount is often tied to the loan or the person’s role in the business. That requirement can set a floor for how much coverage you need.

How to estimate the right amount

Start with the person’s salary, then add the costs of replacing them and the profit they generate. A simple estimate might look like this:

This is a rough model, not a rule. The exact number depends on your business, your margins, and how long recovery would take. If hiring is the main concern, sizing key person coverage around hiring a replacement can sharpen the estimate.

What to avoid when setting the amount

Do not assume the coverage amount is fixed by a formula. There is no standard multiplier that applies to every business. A number that works for one company may be far too low for another.

Also avoid treating the policy as personal life insurance. The business is the beneficiary, so the amount should reflect the business loss, not the employee’s family needs. Revenue multiples can help estimate business sale value, while replacement costs for personal life insurance reflect household needs after a death.

How a business owner can work through the decision

Start by naming the key people whose loss would hurt the business most. For each one, write down the salary, the share of revenue they drive, and the cost to replace them. Then add the profit the company would lose while it recovers.

Compare that total to the salary alone. The difference is often large. That gap is the reason a salary-based number can leave a business underinsured. That gap can widen as the business grows, which is a reason to recalculate after company growth.

Review the estimate with a licensed life insurance agent. The agent can help you check the assumptions and see how different coverage amounts change the premium. This step turns a rough model into a number you can act on.

Next step

If you are unsure how much key person coverage your business needs, a licensed life insurance agent can help you estimate the loss and compare policy options. You can get an estimated rate and see what coverage might fit your situation.