Key Person Cover

Key person cover protects a business against the loss of one of its key employees through death or serious illness. A key person is someone whose long term absence or death would affect the overall profits of the business such as an owner, a director, sales people, or any employee with specialist skills or knowledge.

The key person is the person covered and the business is the policy owner and it pays the premiums. This cover also has the option to be written in trust should the policyholder wish to do so.

There are many ways of arriving at the value of a key person and each situation will have to be viewed individually depending on the business involved, the key person’s area of speciality and their involvement in the business. When calculating the appropriate amount of cover needed you should consider the effect of the loss of the key person on the business i.e. would this directly impact on profits or the cost of hiring a replacement?

The two most popular ways of calculating the cover necessary are as follows;

A simple formula which is commonly used looks at the key person's contribution to either gross or net profits and allows a time for recovery following the loss of the key person's contribution to the business. 

Another way would be to consider this would be the costs of finding and hiring a replacement for someone with the same skills and knowledge. A simple formula which is commonly used would be to consider up to ten times the key individual's earnings for life cover with a lower figure used for critical illness cover (typically up to five times earnings)