Make 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 instills confidence in staff and customers due to positive action being taken and financial obligations being met.
  • 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.

Choosing 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 pided 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.

Case Study

Jim Smith is an IT Manager for a Fruit and Vegetable supply company, Fresh Fruit & Veg. Ltd. He has specialist knowledge relating to the company’s IT systems, and understands the accounts and runs the website for purchasing goods online.

The staff at Fresh Fruit & Veg. Ltd. also rely on Jim for maintenance of their IT systems and to fix all IT problems that may arise on a day-to-day basis. Unfortunately Jim has a major heart attack and is forced to finish working. We look at what happens with and without key man insurance. With Keyman Insurance As Fresh Fruit & Veg. Ltd. took out Keyman Insurance with critical illness benefit included for an amount of £500,000 they receive a lump sum of £500,000.

This was due to Jim being insured as one of their key staff and his illness is defined by the policy as a critical illness This enabled them to source and hire a replacement and costs of recruitment salary were comfortably covered until they could find a permanent replacement or until Jim was able to return to work. They also had enough money to pay for temporary staff to help fill the gap while they searched for Jim’s replacement.

Without Keyman Insurance

If Fresh Fruit & Veg. Ltd. had no Keyman Insurance, they would have had to find the extra funds needed for replacement staff. This would have severely affected the company’s cash flow, and they may have had to take out an additional loan to finance it. This would have left them short of funds for other areas of the business and if they couldn’t afford to meet the payments on the loan the company might have been forced into liquidation.

At Willis and Company (Financial Services), we can work with you to help you understand your business needs and create protection packages which are relevant to your particular business needs.

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: This category of insurance will cover any losses incurred due to the absence of the key person, e.g. a reduction in sales, cancellation or deferral of projects, delays in expansion plans or other losses due to lack of specialist knowledge.

Protection of Shareholding or Partnerships: This category relates to ownership of the business and allows the remaining partners or shareholders to purchase the absent key person’s share.

Staffing Costs: This covers the costs of replacing the key person including the expenses involved in training and recruitment.

Repayment of Loans: This gives the business owners the finance to pay for the proportion of any loans for which the key person was responsible, with the amount of cover being equal to the key person’s guarantee on the loan. This gives the business owners the finance to pay for the proportion of any loans for which the key person was responsible, with the amount of cover being equal to the key person’s guarantee on the loan.

If you would like further information on Keyman Protection or you would like to hear more about Willis Wealth Management, please contact us on 028 9032 9042 or complete our quick enquiry form.

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Willis Insurance and Risk Management is a trading name of Willis & Company (Insurance Brokers) Ltd.

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