Based on the information you provided, the loss of this key person may cost your business:
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HOW DID WE GET TO THIS NUMBER?
This calculation is based on the assumptions that {{Name}} is an {{Answer01}} who is {{Age}} and receives total compensation from the business of ${{={0,0}Comp}} annually.
To protect your business from this loss, you can either self-insure (do nothing) or you can use a life insurance policy. A Key Person insurance policy can help protect your business from the loss of a key person and provide a cash infusion to your business when it needs it the most. Your trusted financial professional can help you understand the options you have to protect your business and identify the amount of coverage needed.
Why should you implement a Key Person policy?
The main purpose of a key person life insurance policy is to offset the economic hardship that comes with the loss of an owner or key person. Life Insurance can provide the business with cash to help in these potential situations.
KEEP GOING
Keep the business running and assure customers it will continue to run.
COVER EXPENSES
Cover expenses of finding, securing and training a replacement.
ASSURANCE
Assure creditors that their loans are safe.
COVERAGE
Coverage may be required for business purposes.
How does Key Person insurance work?
What are the methods of valuing a Key Person?
- MULTIPLES OF INCOME
- REPLACEMENT COST
- CONTRIBUTIONS TO EARNINGS
Multiples of Income Method
This is the most simple and most common method of determining the value of a key employee, which also makes it the most commonly used method. This method uses a multiple of 5-10 times current salary (including any other benefits provided by the employer) as a general guideline.
Replacement Cost Method
This method bases the key person insurance need on what it would cost to replace the key employee. The cost of replacement includes (but is not limited to) the key person’s salary, as well as the cost of hiring, training and replacing the new employee.
Contributions to Earnings Method
This method estimates the cost of losing the key employee by measuring how much of the business’ profit the employee was responsible for. This method multiplies the time it would take to train the key employees’ replacement by the profit the employee was responsible for.
Multiples of Income Method
This is the most simple and most common method of determining the value of a key employee, which also makes it the most commonly used method. This method uses a multiple of 5-10 times current salary (including any other benefits provided by the employer) as a general guideline.
Replacement Cost Method
This method bases the key person insurance need on what it would cost to replace the key employee. The cost of replacement includes (but is not limited to) the key person’s salary, as well as the cost of hiring, training and replacing the new employee.
Contributions to Earnings Method
This method estimates the cost of losing the key employee by measuring how much of the business’ profit the employee was responsible for. This method multiplies the time it would take to train the key employees’ replacement by the profit the employee was responsible for.
These methodologies for valuing a key person vary and different circumstances may warrant different methodologies being used depending on the case specifics.
Term or Perm: What type of life insurance should fund your policy?
Either term or permanent insurance can be used to fund a Key Person life insurance policy – it’s your choice. Here are some of the benefits of each:
Permanent Policy Benefits
- Flexible funding
- Cash value accumulation
- Use policy cash value for other business needs*
Term Policy Benefits
- Low cost
- Level premium
- Set timeframe (generally 10, 20, or 30 years)
NEXT STEPS
Review any issues or questions raised in this report with your team of financial professionals. Be sure to review all relevant information with your financial, accounting, and legal team.
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