Determining the amount of insurance coverage is not a precise science. Some advisors favor using salary as the starting point, but the fact that the range runs from 2x to 10x annual salary shows that the calculation is largely a comfort-level guess. The mid-point ends up being most typical, so it is hardly a sophisticated approach. Replacement cost calculation offers a more rational basis. This begins with the search fees and other costs associated with bringing a new person onboard, such as a moving allowance.
Salary is still the primary consideration.
Or, a new person might come at a much higher base price tag, since performance-based incentives, which became habitual with the previous employee, can seem like a high risk to someone new on the job. Also, the company might consider whether the key person's function can really be handled by one replacement. If the key person wore many hats, the company could be better served by splitting the roles and hiring two less experienced people. Another important measure should be a calculation of the impact to sales and profits of the loss of the key person. If client relationships are jeopardized by the loss, there may be costs to rebuilding them.