The cost
What does it cost when that person is gone?
Finding and training a replacement
Search costs, recruiting fees and the salary you pay while someone new gets up to speed. Often there’s no one inside ready to step in.
The bank notices
If your financing depends on the owner or a key person, losing them can lead the bank to review your credit terms.
The calculation
How much coverage do you need?
There’s no single formula, but most businesses start with three numbers.
Take three numbers:
1
What this person brings in or protects
Their share of revenue or profit, over the time it would take to replace them and recover.
2
Recruitment and training costs
What you’d realistically spend to find and train someone to the same level.
3
Debt you need to cover
Any loan or line of credit that would be at risk if this person died or became seriously ill.
Structure
Three ways to fund it, and they aren't equivalent
Who owns the policy determines whether your estate gets capital gains treatment or dividend treatment. On a seven-figure business that difference is real money.