This is an important question, and there are several ways to approach it. Some companies look at how long it would take to find a replacement, along with the cost of recruiting and training someone brand new. Others base their coverage limits on some multiple of the employee’s annual salary, or on what percentage of the company’s bottom line he/she impacts. Whichever way you’re leaning, it’s important to discuss this issue with a licensed agent, who has experience arriving at strategic figures in this context. Your agent should be able to provide multiple quotes, allowing you to compare premiums based on different policy amounts.
When it comes to disability insurance for a key man or woman, the amount of the monthly benefit is strictly based on the key man’s income. You can’t purchase more than 66% of that employee’s monthly income. The only variables that an employer can adjust are 1.) the length of time for which you want the benefit paid (5 years, 10 years, up until age 65, etc.) and 2.) the waiting period that exists until the benefit kicks in (30 days, 60 days, 90 days, 180 days, etc.).
As part of your application, you will likely need to explain how you arrived at the desired coverage amount.