How Much Key Man Insurance Do I Need?
The amount of key man insurance you need can vary depending on several factors unique to your business.
Here are some factors to consider when determining how much key person insurance your business needs:
Valuation of the Key Person’s Contribution: Calculate the key person’s current and potential future contribution to the company. Consider their role, responsibilities, and the revenue or profit they generate. A key executive or salesperson might have a higher value than someone in a support role.
Financial Impact of Loss: Estimate the financial impact the loss of the key person would have on your business. This could include lost revenue, increased expenses (such as recruitment and training costs for a replacement), and potential loss of clients or business opportunities.
Debts and Liabilities: Consider any outstanding debts, loans, or liabilities that the company has. Key person insurance can also help cover these financial obligations if the key person’s absence affects the company’s ability to meet them.
Coverage Length: Decide how long you want the coverage to last. Some policies have a fixed term, while others may be more open-ended. The length of coverage may depend on when you anticipate the key person’s role being replaced or when the financial impact is likely to diminish.
Insurance Costs: Get quotes from insurance providers to determine the cost of the coverage. The cost will depend on factors such as the key person’s age, health, and the coverage amount.
Business Size: The size and financial health of your business also play a role. Larger businesses with more resources might require more coverage to mitigate potential losses.
Legal and Regulatory Requirements: Be aware of any legal or regulatory requirements regarding key person insurance in your jurisdiction or industry. Some businesses may be required to have a certain level of coverage.
Consult with a Financial Advisor: It’s often a good idea to consult with a financial advisor or insurance expert who can help you assess your specific needs and choose an appropriate coverage amount.
Key person insurance is an important tool for risk management in businesses that heavily rely on specific individuals. The coverage amount should be sufficient to help your company navigate the challenges posed by the loss of a key person, but not so excessive that it becomes a financial burden. Regularly reassess your key person insurance needs as your business evolves and grows.
Calculating the amount of cover
Companies that lose a key person due to illness or death will often go into debt or worse out of business entirely. So you need to make sure every single financial contribution is taken into account. We put together a key man insurance calculator here to help work out the costs more accurately.
For more information check out our guide to key person insurance here.