There are three methods in calculating the level of keyman/Key Person cover :-
The Salary Based Method
In this method a key person’s salary is multiplied to give the company a sum assured. This multiple is usually 5. The keyman/Key Person’s salary including benefits is used in the calculation. This method is normally used where the salary reflects the
employee’s contribution to the company and is therefore not suitable where the key person’s salary bears no relevance to the company profits.
The Payroll Method
The payroll method estimates the keyman/Key Person’s contribution to the company profits by dividing the keyman/Key Person’s salary by the company’s total wage bill and then multiplying that by company’s gross profit level.
The Profits Method
The profits method is estimated by multiplying either the gross profits or the net profits. The typical multiples are 2 x gross profits or 5 x net profits.