How do I measure the value of a person for a key man policy and how do I prove it to an insurer?
The type of business and their role within that business determines whether a person should be classed as key.
To ensure the company has the right level of cover, insurers will require financial evidence. The evidence required will vary depending on the type of cover and the sum assured. However, most underwriting departments will normally ask for:
• A completed business insurance questionnaire.
• Three years' audited accounts.
• Copies of any loan agreements related to the key person.
• A covering letter, with the proposal form, detailing the reason for cover and the method of calculating the sum assured.
Probably the most common methods of calculating maximum cover amounts are 'multiple of salary' and 'proportion of profit.'
Multiple of salary takes the key person's salary and multiplies it by an agreed amount. The multiple used will change, depending on the type of cover required. For example, Swiss Life insures between seven to 10 times the gross salary for life cover, three to five times salary for critical illness cover and two and half times salary for income protection.
The proportion of profits method multiplies the average gross profit levels over a period ' normally two years ' and multiplies it by a percentage, typically between 50 and 75%.
The proportion of profit method ensures the sum assured is closely related to the loss of profits caused by the loss of a key person.
Nicola Smith
