The vast majority of businesses have, and could easily identify, one or more employees whose death would have an adverse effect on the future of the company.
Anyone on whom a business depends on for its continued success, or existence, and on whose death the business could suffer a financial loss can be classified as a ‘key person’.
For example this person could be a director, an employee or a consultant.
If you are a sole trader it could be your wife, husband or partner. It is they who would need considerable sums of money to repay outstanding loans or to simply keep the company running until a buyer could be found.
If one of these ‘key’ people were to die or suffer a serious illness it could lead to serious financial losses in a number of ways:
Why a key person is so valuable?
- They may possess exclusive knowledge or expertise, which if lost would have a negative impact on the companies business. A great deal of business could be lost before the company could bring in another experienced person.
- You could have a serious decline in profits and business confidence if the success of your company is largely dependant on one person. This person could have valuable personal contacts and it takes time and expense to recruit and train someone else as a suitable replacement.
- The key person may be a guarantor for company loans.
For these reasons companies often consider it advisable to insure the life of a person they consider to be a key person. Life Insurance cannot address the emotional issues left by the loss of a colleague, but it can help to keep the company solvent for the remaining employees.
According to John Geraghty manager of LABrokers.ie “People often under estimate the risk to a company. Remember an individual has a greater than one in four chance of death before retirement and a sixty per cent chance of suffering from a serious illness before age 65”.
How do you protect a ‘key’ person?
A ‘key person’ policy is a policy which is taken out by a company to provide protection should the person insured die whilst still in service, or cannot perform their duties as a result of a serious illness. The most popular form of cover used to protect against death is normally a term assurance policy. The cost of such a policy depends on a number of factors including the age of the person and the amount of cover required.
How much Cover do you need?
To measure a key person’s value, it is necessary to estimate the overall cost to the company as a result of the individual’s death.
- The loss can be measured by including the following:
- The contribution of the key employee to overall business profits and consequent reduction in profitability, income and growth by his/her death or serious illness. As a rule of thumb ‘five to ten times earnings’ is sometimes used. However, this may not give a fair reflection of the persons true worth so advice from the company accountant is often sought.
- The particular skills possessed by the key individual and the cost of replacement.
- Loss of business contacts.
- Repayment of moneys invested by the key person in the company to the individual’s estate. In many cases you may find that some of the company borrowings have been dependant upon a personal guarantee or the continued involvement of the key employee?
How do you take out a policy?
Arranging such cover for larger companies can be a highly technical area. For larger companies, financial advisers will help business management to determine who their key persons are, to seek agreement from the board and to recommend appropriate insurance to protect business profits against such loss. Consideration would also be given to possible taxation implications for the Company. The resultant policy is owned by the company for the benefit of the company and is not a personal policy owned by the key person being insured.
In the case of family companies cover is sometimes arranged by their advisor outside the company as a personal Life Insurance cover.
As an indication, how much does it cost?
Arranging adequate Life Insurance is the only way to ensure that the necessary funds will reach the right hands at the right time to ensure survival of the business and you’ll find the cost of purchasing such cover has fallen over the past few years due to increased competition in the marketplace.
Whilst assessing the level of cover is a subjective exercise the table below contains an example of how reasonable it is to provide valuable protection for your business.
John Geraghty Manager, at LABrokers maintains “The importance of key person cover cannot be overstated. Companies protect themselves against the risks of fire, theft and litigation but sometimes overlook the most important area, their key staff. This cover protects the financial security of the company and makes good commercial sense.”
Cost of purchasing such cover
Irish Life, Caledonian Life and Eagle Star would be amongst the most competitive specialising in this high sum assured end of the market. Typical premiums for a Male non-smoker 40 next birthday looking for €1,000,000 of level term over 20 years could expect to pay around €121.57 a month. (A smoker can expect to pay about 100% more). Same level of cover for a female would work out around €88.59 (female smokers can expect 80% more). In light of competition in the Life Insurance market persons with this type of cover should review it on a regular basis to ensure they are not paying over the odds. In many cases persons may be able to obtain the same level of cover with an alternative provider at a cheaper premium.
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