Key Person Insurance Costs
Key person insurance allows you to protect your business with regular payments or lump sum should you or another key person pass away unexpectedly or be diagnosed with a serious illness. This money can be used to help with the running of the business, find replacement members of staff, or even help the business close without resorting to bankruptcy.
Key person cover is purchased through a business, but how much will a policy end up costing, and how can you find the best policies with the most competitive premiums?
In this article, we look at how much key person insurance could cost you, how quotes are calculated, and why you can get the best deals by working with an insurance expert.
How much does key person insurance cost?
The amount you pay will depend on numerous factors, and there are many ways to calculate how much your insurance will cost. You may be able to get key person insurance from as little as £2 or £2.50 a week, however, this is not reflective of all business types and sizes, and may only apply to a fraction of companies.
Bear in mind that premiums may be higher for more valuable businesses, and premiums may fluctuate depending on the key person’s contributions to the firm.
Also, the final figure you receive will be based on numerous factors, including what type of cover you want.
You can choose between two options:
- Life insurance only:
A lump sum is paid out if a key person dies or is diagnosed with a terminal condition and given 12 months or less to live.
- Life insurance with critical illness cover:
If your key person(s) suffers from a critical illness, this can also impact your business. Adding critical illness cover to your policy will protect your business if the key person suffers serious illnesses such as a stroke, heart attack, or is diagnosed with cancer.
Some insurance providers will give you the option to choose between a policy that covers the cost of replacing an individual in the business, or to cover the predicted amount of loss to the business.
For the most accurate quotes, speak with one of the expert financial advisors we work with. They can find the best policies with the most competitive premiums thanks to their whole-of-market access.
Our advisers are regulated by The Financial Conduct Authority and so you will be dealing with a highly trained person that adheres to strict rules of conduct.
What is the average cost?
The average cost of key person insurance varies and depends on numerous factors and details, so using a generic online calculator won’t provide you with an accurate figure.
While there’s no one ‘average’ cost of a key person policy, you can find policies with the most competitive premiums by speaking with an insurance expert.
What are the rates for key person insurance?
Key person insurance providers offer a variety of rates, which is why it’s so important to shop around for different quotes before you commit to purchasing a policy.
Each business’ situation is typically reviewed on an individual basis so that the policy provides you with an appropriate amount of cover to your exact needs and circumstances. The factors which will affect your rates and premiums may include:
- How the business operates
- The key person(s) you want to cover
- Their involvement in the business
- The length of time you want the policy to run, e.g. 20 years
- The amount of coverage you require
- The age of the key person
- The gender of the key person
- If the key person has a pre-existing health condition
- Whether the key person is a smoker
How are quotes calculated?
Insurance quotes are typically calculated based on how much the key person directly influences the amount of money coming into the business (gross profit), or if the key person is responsible for managing cash flow (net profit). Different common multiples are then given to both net and gross profits, with net often being a higher multiple.
There are typically three ways to calculate quotes for a key person insurance policy:
- Proportion of profits:
This is the key person’s salary divided by the total salary bill (in the last trading period) multiplied by profits (net or gross) times the number of years it would take to replace them. For example, £50,000 (key person’s salary) / £250,000 (total salary bill) x £400,000 (net profits) x 2 (no. of years to find replacement)= £160,000.
- Profits-based formula:
This would be the amount of net or gross profits the key person had a direct hand in multiplied by a common multiple, for example, £30,000 of gross profit x 2 = £60,000
- Salary-based formula:
This is the salary of a key person times a common multiple, for example, £40,000 x 5 = £200,000.
In this case, gross profits refer to people who directly influence profit coming into the business (such as a sales manager), whereas net profit refers to people who are directly in charge of managing the cash flowing into the business (such as a director). Many insurance providers will offer a higher common multiple for net profit individuals, for example, x5 instead of x2.
Is there a calculator I can use?
There are calculators you can use online to calculate the cost of taking out key person insurance, however, these should only be used as a rough guide, so it’s in your best interest to seek advice from an insurance advisor.
Online calculators are only to provide you with a broad quote, so your quotes could vary depending on your needs and circumstances. Insurance experts, on the other hand, are able to provide you with tailored, more accurate quotes. Get in touch for a free, no-obligation chat about your key person insurance options.
How to compare key person insurance providers
If you compare the market yourself you’re likely to get a rough indication of what you could get, as many important factors won’t be calculated in. Comparison websites aren’t truly reflective of what’s actually available on the market as many companies promote themselves to feature on these pages, which is why it could prove invaluable to work with an independent advisor.
While many big-name providers such as Aviva, Vitality and Legal and General offer key man policies, they may not provide you with the most competitive rates. This is why speaking with an advisor can help, as they can use their expertise and exclusive industry access to source highly tailored policies to suit your budget.
Speak to an expert
While it’s tempting to opt for the ‘easy route’ and compare quotes on a comparison site, you won’t typically find the best deals there. Your business and the people who run it are unique, so it makes sense to find a key person insurance policy which lives up to that standard.
This is where we can help by matching you with an independent, fully regulated financial advisor who can source highly tailored policies from providers that may not be available to the general public.
Interested in finding out more? Make an enquiry or call us on 0808 189 0463 and we’ll match you with an expert for a free, no-obligation chat about your key person insurance options. Not only could you save loads of time and hassle comparing policies yourself, you could also save money.