Keyperson Insurance is life assurance effected by an employer on the life of a key employee, who may also be a shareholder or director, to protect the company against the financial consequences of that individual's sudden death.

Keyperson Insurance is designed to protect the value of the company's human assets much in the same way as fire insurance protects a company's physical assets.

Keyperson Insurance can therefore provide an immediate lump sum payment to the company. The company would use these funds in any way it chooses:

• repayment of bank loans, particularly any to which the keyman has given a personal guarantee.
• repayment of any loans the keyman may have made to the company.
• recruitment of a successor.
• investment in the business.

Who is a Keyperson?

A keyperson is any 'key' employee or Director on whom the business depends for its continued success, or existence, and on whose death the business could suffer a financial loss.

Amount of Cover

In determining the appropriate amount of keyperson insurance cover an insurable value must be put on the potential financial loss that the company would suffer on the death of a key individual.

In assessing the amount of cover two important factors to consider are:

• Loan Repayment. Any loans personally guaranteed by a "keyperson" or any loans made by him/her to the company.
• Loss of profits cover. The keyman's death could jeopardise the trading position and profitability of the company.
• The cover required is the estimated financial loss that the business would suffer, plus the costs of replacing him/her.

Other than in the case of loan cover, estimating the financial loss can be extremely difficult. The level of cover is normally related to either the individual's salary or to the company's profitability. Typical maximum cover levels should not exceed 10 times salary, or in relation to profit a maximum of twice gross profit or 2.5 times net profit. (i.e. profit after expenses but before tax).