How Much Key-Man Insurance?

The amount of insurance that should be carried on the life of a key man is determined by many factors, notably the purpose for which the insurance is intended, the amount the business can afford, and the size, value, and profitability of the business. Here is a list of considerations for reference:

1. The tangible value of the business, figures an investment return on that tangible value(say 7%), deducts that from average profits after taxes, capitalises the difference at a multiple of 5 or 6, and treats the resulting figure as the earning power derived from key man onto the business. If there are more than 1 key man, divide this figure according to their estimated contribution to the profitability of the business.

2. The amount of personal guarantees undertaken by the key man for the business.

3.The value of the share owned by the key man.

4.The cost of an appropriate annuity or his/her family.

5. The cost of paying death benefits or continuing salary payments to his/her family for some agreed period of time.

6. The estimated business operating cost for 1 to 2 years.

7. The estimated HR replacement cost for this key man to the business.

8. The estimated business liquidation cost at the death of key man. This applies to business with limited scope to continue if the key man dies.

All responsible businesses ought to have a key man insurance to provide assurance to their clients, banker, employees, and business partners. Strangely, the take up rate is not very high in Singapore.