Identifying a key person within your business is as simple as highlighting anyone whose loss, either permanent or temporary, would affect the business’s ability to maintain turnover and generate profits.
Key person policies are generally used for profit and replacement, and providing funds to either replace lost profits, assist with short term cash flow or enable business to attract (“golden hello”), recruit, train and pay for a replacement. Therefore, anyone within your business who this would be of benefit for you would likely identify as a key person.
Additionally, and often in conjunction, the cover can be also be used for business liabilities, as follows:
- Directors Loan Accounts – must be repaid on death
- Business loans – Banks may recall loan on the death of a key person and/or the owners may have given personal guarantees
- Overdrafts – recalled, reduced, reviewed by the bank
- Invoice Discounting
- Redundancy costs for the business having to close
How to calculate an adequate level of cover for your key person
This could be calculated in a number of different ways, and will typically relate to what the main use of the proceeds will be. For example, if you are looking to cover purely business liabilities then this would ultimately be driven by the level of liabilities or debt.
Typical methods and maximum amounts are:
- Multiple of salary – 7x Salary for life cover / 5x Salary for Critical Illness (diagnosis of a serious illness such as Heart, Cancer etc)
- Multiple of profits – 5x Profit for life cover / 3x Profit for Critical Illness
- Actual impact – Loss of profit + Additional costs – Savings
- Proportion of payroll – (Salary X Turnover X Years to recover) divided by total payroll