Key Person Insurance
A company has a separate legal entity from its shareholders and employees. Therefore the death of a shareholder or employee does not directly cause the ‘’death’’ of the company. However, the death of a ‘’key’’ shareholder/employee could, in certain circumstances, lead to a financial loss to the company, due to the loss of the particular expertise, reputation, experience and contacts the individual had.
Keyperson Insurance seeks to financially protect the shareholders of the company against this potential loss.
Keyperson Insurance is therefore a term used to describe life assurance effected by a company on the life of one of its key employees or directors with a view to compensating the company for an anticipated financial loss of profits following the death of that individual.
Quantifying the Loss
The death of a key employee or director could cause a financial loss to the company in two different ways:
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Loans to the company could become repayable, particularly any loans from banks or any other institutions for which the individual had given a personal guarantee.
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Loss of profits caused by the loss of the individual’s expertise, experience, contacts and knowledge of business.
It is very difficult to quantify the loss of profits. One measure used is to take a multiple of the individual’s remuneration, say between 5 and 10 * remuneration. Keyperson Insurance is not meant to generate a windfall profit for the company rather to replace the anticipated loss of profits on the death of the individual.
A Keyperson Insurance policy is a life of another policy, with the company as the proposer and policyholder, and the key employee as the life assured.
