Keyman Assurance: Your Questions Answered

by Free Insurance advice on June 10, 2012 · 0 comments

in FAQS on Insurance, Insurance in Nigeria, Insurance Terms and Terminologies, Life Insurance

Keyperson or Keyman Insurance is a form of term assurance which is put in place to protect the company in the event of an unexpected death of one of its key staff. A keyperson may or may not be directors.

It is purchased by the company on the ‘life’ of an employee whose key skills are regarded as integral to the of the company. The employer of the keyperson(s) pays the policy premiums and will receive a lump sum in the event of the death of the keyperson insured.

The keyperson may or may not be a director. A keyperson is anyone who the company depends on for its continued , relies on their specialised skills, and contacts and whose death would have serious consequences for the company. Examples of a keyperson would include a Finance Manager, leading Sales person or HR Manager.

The cost of losing a keyperson include:-

- Loss of Sales and profits

- Management disruption

- Loan (directors loans to company or guarantees which may have been given to the bank)

- Company disruption

How to Calculate the amount of cover required:

There are several methods in determining the amount of cover required, the most common being through examining the ‘Replacement Cost’, ‘Contribution to Profits’ or ‘Loans’:

Replacement Cost

This method examines the financial and non-financial costs involved with replacing a key member of staff. The factors involved in calculating the replacement cost of an employee include:

- The loss of profitability

- Cost of recruitment

- Training a replacement

-

The likelihood of an , extra bonuses as well as the amount of time it will take for the replacement to handle their responsibilities are also factors that need to be taken into account.

Contribution to Profits

This approach takes into consideration the key person’s contribution to net profits. The usefulness of this method depends on the position held by the keyperson. For example, sales records may help determine the estimate for a Sales Director.

Loans

This approach involves using the loan amount as Sum Insured. If a company takes out a commercial loan, the lending institution may require a Keyperson policy to be taken out to cover this liability.

The premium computation may either be single premium or annual premium. Tenor of Loan, Lending rate and age are some of the factors used in determining the premium payable

 

Adapted from: Pol O Murchu/ Ezine Articles

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