Key Man Insurance
Have you thought about what could happen if your business lost a key person through illness, injury or even death?
Case Study -Dave is an IT Consultant for a furniture supply company, Samuel’s Furnishings Ltd. He has specialist knowledge relating to the company’s IT systems, and understands the accounts and administrative systems of product supply companies -
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Key Man Case Study
Making the right choice
If you lose a key person it could have a devastating effect resulting in a reduction in sales or a slowdown in production. You may experience a loss of confidence in your business from staff, shareholders, customers and suppliers. If staff leave and customers and suppliers take their business elsewhere the final outcome could ultimately lead to a loss of profits and imminent closure for some companies.
With Key Man Insurance you will receive a financial payout that can help to shield your business and keep things running smoothly. It is possible to insure any of your key members of staff and they don’t necessarily have to be shareholders.
You may have heard Key Man (or Keyman) Insurance Policies referred to by various names including Key Person Insurance, Business Protection Insurance, and Key Man Life Insurance. We have a range of policies available through leading providers, which offer many benefits.
Advantages of Key Man Insurance:
- It enables you to repay any loans taken out by the key person.
- It helps with recruitment and training costs for replacement staff.
- It allows you to meet ongoing expenses whilst the level of sales recovers.
- It facilitates payment for outside consultants or expert advice.
- It instils confidence in staff and customers due to positive action being taken and financial obligations being met.
As well as the financial benefits of taking out Key Person Insurance, some Key Man Life Insurance Policies give you access to support and legal advice relating to the replacement of senior members of staff. If you are the key person who is unable to continue your role due to critical illness or accident, you could also receive careers advice when you are ready to return to work.
Categories of Key Man Insurance.
Keyman insurance cover comes under four different categories:
Protection of Profits
Staffing Costs
Protection of Shareholdings or Partnerships
Repayment of Loans
“Key Person Insurance cannot replace the loss of a key person, but it can help to ease the financial burden that can ensue. Without the right cover in place you may also risk losing your business.”Your Keyman Options
There are various options to choose from with Key Man life Insurance. You could opt for Life Cover only, Critical Illness Cover, or both Life Cover and Critical Illness Cover. You can select different levels of cover and terms depending on your requirements, and there are also policies available that pay out a regular income in the event of sickness.
The table below summarised the types of cover available. If you would like to discuss your options with an advisor, please give us a call on: 0845 680 8495
| Type of cover | What it provides |
|---|---|
| Life Cover | A lump sum on death or terminal illness of you or another key person. |
| Critical Illness Cover | A lump sum if the key person becomes critically ill as defined by the policy.. |
| Life & Critical Illness Cover | A lump sum on death, terminal illness or critical illness |
| Sickness Cover | A regular income during the sickness or injury of the person insured. |
| Key Person Sickness Cover | A regular income during the sickness or injury of the person insured. |
| Premium Protection | This covers payment of your premiums if you become ill and are unable to work |
Choosing your Level of Cover.
The cost of Keyman Life Insurance varies depending on the level of cover you take out. If you cannot afford insurance for the full amount, you could opt for a lesser amount of cover and add to it at a later date when you can afford it. This would be better than having no Key Man Insurance at all.
When deciding how much cover you require, there are a number of factors to consider:
- How would your business’s profits be affected by the loss of you or another key person?
- If you had to replace that person, how much would it cost in training and replacement?
- How quickly would your business recover from the loss of a key person?
- Would the loss of that person cause your business to lose new and existing customers?
To determine the amount of cover needed three main methods are used: -
- Multiple of Remuneration
This entails multiplying the key person’s salary, usually by 5, in cases where that person’s salary is indicative of the contribution that he makes to the profits of business. Therefore it is not suitable if this isn’t the case.
- Multiple of Profits
With this method the gross or net profits are multiplied by a figure, which is usually 2 for gross profits and 5 for net profits.
- Contribution to Profitability
A set formula is used to estimate the key person’s contribution to the profits of the business, as follows:
The amount of the key person’s remuneration is divided by the business’s total salary expenditure then multiplied by the average gross profit for a period of two years. That figure is then multiplied by the number of years that the recovery of the business is expected to take.
