Key Person Cover

One of the most valuable assets of a business is its staff, with business success or failure depending on them. Some of these people because of their specialised knowledge, skills or contacts, are vital to the profitability of the business. They are often referred to as ‘key persons’ as their death or incapacity could result in the financial performance of the business being adversely affected. Such an event could lead to a significant fall in profits, perhaps to the inability to repay loans or meet other obligations and, in extreme cases, to the collapse of the business.

Just as it is necessary to insure a business against the loss of or damage to physical assets, it is also vital to insure against the loss and/or against the serious illness/disability of a key person.

It is usual for the level of cover to be determined in one of three ways:

Payroll-Based Approach
This is suitable when the recovery period would not exceed five years and the key person’s salary and total payroll are relatively stable. It is arrived at by using the formula:

Key person salary x Sales turnover x Expected years to recover

Salary-Based Approach
This is suitable when the aim is to find an equally competent replacement. It does not however allow for the key person’s contribution to overall turnover. A popular multiple to use is five times the key employee’s total remuneration package.
Profits-Based Approach
This is suitable when there are few (or only one) key persons. Popular multiples are either two times gross profits or five times net profits. Gross profit is taken as total sales less cost of sales. Net profit should be taken before tax.
Key Person Level Term Assurance policies have a known level of cover that will be paid out in the event of death within a known period. Premiums remain level throughout and should the person assured survive the policy term, there will be no benefit. As this type of contract only provides cover in the event of death there is no surrender value, so if you stop paying the premiums at any time, cover will cease.

Level term assurance, written on the life of a key employee enables funds to be made available to the business in the event of that person’s death to help in some of the following circumstances:

    • Offsetting any reduction in profits;
    • Prevent the business getting into financial difficulty;
    • Employ a replacement; and
    • Pay off a loan or overdraft to reduce the business’ liabilities.

Key Person Critical Illness Cover is designed to pay out a lump sum if a key person is unfortunate enough to suffer from any of the specified critical illnesses but survive for a period of time after diagnosis (normally 28 days). This, if paid out, enables funds to be made available to the business in the event of that person’s illness/disability to help in some of the following circumstances:

    • Recruitment of a temporary or permanent replacement;
    • Replace loss of profits arising from the serious illness of a key person;
    • Tide the business over until the key person is able to return to work;
    • Pay off a loan or overdraft to reduce the business liabilities; and
    • Contribute to the medical care of the key person or provide financial support for their immediate family.

The minimum age to take out a life assurance contract is 18.

Loss of profits is the only type of key person assurance where premiums may be allowed as a trading expense for tax purposes, and for tax relief, a number of conditions need to be met.

For more information, click on the most suitable link:

Residential Mortgages
Mortgage Protection
Buildings & Contents Insurance

Your home may be repossessed if you do not keep up repayments on your mortgage.

There will be a fee for mortgage advice. The precise amount will depend upon your circumstances but we estimate that it will be £595.

The Financial Conduct Authority does not regulate most Buy to Let Mortgages.