Venture Capital Investors are Bringing Key Man Insurance Cover to the Fore

Call in a Professional Adviser

We’re frequently called in by private equity or venture capital investors to tackle such risks. While some require sufficient Key Person cover to protect their investment, others will also want to see their projected return covered, too. Fortunately, this can be done for any firm, even those that have yet to make a profit or are currently losing money.

A good Key Man Insurance package can also protect against the risks of:

•         Losing key clients
•         Not delivering on agreed contracts
•         Failing to generate new business
•         Missing debt repayments
•         Additional recruitment and training costs
•         Temporary staffing costs; and (potentially)
•         Start up costs for a new business

But finding the right level of cover for the right people can be more art than science. This makes finding an experienced adviser who can guide you through the process a must.

Key Man Insurance: Agreeing Terms

Calibrating the right level of Key Person cover requires a dialogue between a company and its investors – something an adviser is well positioned to mediate.

While these discussions might dictate the eventual sum assured, protecting business continuation also means including Critical Illness Protection alongside any Life Insurance.

Given the complexity and leg-work involved, having an experienced adviser in your corner can make all the difference, especially when financing requirements introduce tight deadlines. Meanwhile, the cover that comes as a result could one day be the difference between whether a company sinks or swims.

Putting a Value on Key People

Because Key Man insurance rests on there being an ‘insurable interest’, the level of cover must reflect the profits at risk.

Generally, insurers set limits based either on a firm’s profits or the employee/director’s income. A broad rule of thumb is that key people should be covered by up to twice their contribution to gross profits or five times their contribution to net profits (although no insurer is likely to offer Key Person cover more than 10 times an individual’s salary).

The tax treatment of a Key Person Insurance policy also needs to be factored in when calculating the level you need. If the benefits are liable to tax, the level of cover will need to be grossed up by a company’s corporation tax rate. If this isn’t done, the sum assured might be too small to make a difference when a key person is suddenly out of the picture.

Samantha Haffenden-Angear
Business Protection Expert at Drewberry

Sharing the Burden with a Financial Adviser

For the leaders of most small companies, the job of setting up Key Person Insurance is far too much to take on while running a successful company. This is why finding an experienced adviser pays dividends – especially as there’s no fee attached for the advice they provide.

An adviser can help put worthwhile commercial values to the contributions made by different staff members. They can take on all the legwork required for a watertight application and assemble valuable business data that’s often appreciated by investors.

They can search the market for the best combination of premiums and policy terms and monitor a policy throughout its lifetime making sure that the benefits continue to rise in line with the company’s profit – something especially pertinent to the UK’s armada of fast-growing smaller companies.

If you would like any help arranging Keyman Insurance then as independent advisers with a specialist business protection team, Drewberry are ideally positioned to assist. Simply contact us on 02084327333.

Tom Conner
Director at Drewberry

*http://www.telegraph.co.uk/technology/2017/10/28/silicon-valley-investors-double-funding-uk-tech-brexit/