Welcome to RGIB’s Keyman Insurance Center – but, we prefer to call it Key-Person Insurance
Key Person Insurance is an important part of any Business Insurance Program
RGIB’s specialises in providing cutting edge business insurance products and services; and Key Person insurance is a product that requires particular expertise to ensure Stakeholders equity & interests are covered properly; - the stakes are too high to get this type of cover wrong.
In simplistic terms Key Person insurance can best be described as an insurance policy taken out by a business and/or it’s stakeholders to compensate that business and/or its stakeholders for financial losses that would arise as a result of the death or extended incapacity of a key person involved in the key operations of the business.
Key Person insurance provides a business and it’s stakeholders a high degree of certainty in uncertain times; including for such things as:-
- meeting business expenses;
- business succession planning;
- certainty of equity value;
- agreed funding to purchase the equity;
- continuity of equity value for the surviving spouse;
- funding of re-payments of any capital loans or personal guarantees in the event of a major illness, injury or death of a Key Person or business partner;
- provides funds for recruitment & training of a suitably qualified replacement employee;
- meeting requirements for bank business loans;
- salary packaging benefits; [dependent on the persons own taxation affairs]
A key person might be a:-
- business owner(s);
- partner in the business;
- partner of a professional practice;
- chief executive officer of a corporation;
- senior executive of a corporation;
- key project manager;
- senior management of a business;
infact; there is no legal definition of "key person" but, for insurance purposes a key person is generally someone in a business whose knowledge, work, or overall contribution is considered uniquely valuable to the company; ie,
a legal practice’s Principal Partner who is the driving force behind the practice’s ongoing success; which, in the case of that person’s death or incapacity that prevented them from continuing in that role, would cause an material loss to the practice’s income and thus, its value – and also its ability to continue to thrive.
Essentially, there are two [2] ‘types of loss’ which can trigger a Key Person insurance claim; they being,
- the death of the Key Person; and/or
- the incapacity of the Key Person rendering them unable to work in the ‘key’ role insured.
Getting the Right Key Person Insurance Cover
Of course, every business and/or partnership is different and requires specific consideration to the interests of stakeholders prior to determining what type and level of cover is required; - this is fundamental to getting the right Key Person insurance policy.
As an indication, there are a variety of methods that can be used in selecting the right amount of Key Person insurance to have, including the:
- ‘replacement cost method’ (what the cost is to replace the key person);
- ‘contributions to earnings method’ (percentage of earnings to company revenue);
- ‘multiples of income method’ (current salary multiplied to determine value);
Thus; it is not unusual for us to work with a client’s accountant to determine what valuation methodologies are the most appropriate for the particular client – every stakeholder’s equity and interests have to be considered.
RGIB specialises in providing Key Person Insurance services and can help arrange a valuation of the business and stakeholders equity [essential for forward planning of amounts to be covered] – as is having an ‘Option to Purchase Agreement’ in place which sets out the rights and obligations of stakeholders in the event of a claim.
For quick reference to a couple of important fundamentals such as Valuing a Business & Stakeholders Equity & Valuing an Employee please click on either of these links - or go to frequently asked questions button below.
