Key person valuation.

The two standard methods are the multiple-of-salary method and the proportion-of-profits method. Most advisers run both and take the higher figure, on the basis that under-cover is the worse risk. The result is the sum at which the policy is written.

The policy is owned by the business, premiums paid by the business, and the benefit paid to the business on death or critical illness. Tax treatment depends on the so-called Anderson rules, which require the cover to be on a specific employee with no proprietary interest in the company beyond a small shareholding, for a term shorter than the employment, and with the benefit used to make good a loss of profit.

Term length matches the strategic horizon of the business case the cover supports: a loan term, a contract length, or the time you would expect to recruit and ramp up a replacement. Five to seven years is a common starting point.

Often paired with shareholder protection on a small to medium-sized company. The two cover different risks. Key person covers the loss of revenue or expertise, shareholder protection covers the buy-out of a deceased shareholder's shares.