Key Person Insurance from Ascot Lloyd
All businesses have someone who is crucial to the day to day running of the business. That person may be a director or manager or a sales person, without whom, there would be no business. Each person may carry out a specialised role which not many other people can do.

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WHAT WOULD HAPPEN TO THE BUSINESS IF THAT PERSON WAS UNABLE TO WORK FOR A PERIOD OF TIME DUE TO ILLNESS OR INJURY?
Would the company suffer a loss of profits?
Would you have to recruit and pay a temporary replacement?
Would you be able to meet contracts or obtain new business?

Key Person Income Protection
This is a policy whereby the company pays the monthly premiums and will receive a monthly benefit should the key person be unable to work due to illness or injury. The benefit can be used to pay a temporary replacement, cover any loss of profits and generally help the business cope without the key person’s input for a period of time.

Key Person Assurance
It is sound business practice to make provisions to protect your business and any money you have in it against the problems caused by death or illness. Key Person Insurance represents the ideal solution as it is virtually the only way to ensure money will be available on death or illness, whenever this may occur.

More Information
Currently businesses are keen to insure their physical assets to protect their business against business interruption costs or loss of profits but director’s seem to overlook their most important assets – their people and themselves.

Directors / Proprietors and Key People are assets to a business, but they can also be a liability because if they die or become ill, their absence can cause the business to fold.

Key Person assurance is a term assurance taken out on lives of key people to protect the business should they die or become ill. It will pay out a lump sum on the death of key person insured. You can add a critical illness element to the cover, so the policy will pay out on death or illness. Or you can have two separate policies, a life insurance and critical illness insurance, which will ensure there is money available in both events.

The lump sum can be used to:

• Recruit and train a successor
• Cover any loss of profits which may occur during this period
• Cover any debts or costs left by the deceased
• Cover any business interruption costs
• Maintain expenditure
• Help the business cope without the key person’s input

A key person who is critically ill will have the same effect on the business, as if they had died. So it is always better to have critical illness cover as well as Key Person Life Insurance to combat the above problems, which may arise.

Tax Implications of Key Person Assurance
Click here to go to the Inland Revenue web site

Calculating the amount of cover you need
Multiples of remuneration
The method assumes that the value of the key person is reflected in his or her total remuneration package. How many times you want to multiply that figure for the sum assured will depend on the type of business you have and what the estimated difficulty would be in finding a replacement key person. Also think about the recruitment and training costs. This method is perhaps the easiest way to estimate potential loss and determine the appropriate level of keyman insurance.

Contribution to profits
This method estimates the impact that a key person has on the company’s net profit. The firms first calculates the expected profit from a normal return on capital (e.g., the net book value of assets). Profit in excess of this normal return is assumed to result from the efforts of key employees.

An estimate is made of the percentage of profit attributable to each key person. This percentage is then multiplied by total excess profit, to determine the amount of excess in pounds from each key person. This sum is then multiplied 3 times the number of years it would take to recruit and train a successor. The amount of key person assurance is determined accordingly.

Cost of replacement
This method totals the direct, out-of-pocket costs involved in finding, hiring and training a replacement key person, as well as the estimated, loss – of – opportunity costs or profits.

Share Protection
This type of cover you would take into account how much your shares are worth.