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Guidelines |
Requirements |
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Multiples of earned income of the proposed insured from the business. •To age 50, an income factor of 10 times income is suggested. •Above age 50, an income factor of five times income is suggested. •An established time with the company, unless it can be documented that the proposed individual brings "so much to the table" that profitable business continuation would be dependent on this individual. •One or two employees requested key-person coverage on their employer/owner (who wants the employees to run the business after the owner's death) involve speculation and should not be submitted. If a purchase agreement between the parties exists (see Buy-Sell), consideration may be given. |
Always needed: Gross annual earned income on the application. For cases $250,001 or more: A financial questionnaire will be requested. Note: any other type of financial info can be requested at Underwriter’s discretion. |
Business situations exist where the individual(s) in a business have a worth to that organization that helps ensure continued profitability. The purpose of key-person coverage is to insure against the loss of the individual's expertise, skills, revenue-producing abilities, and the integrity and reputation they may bring to the business. In the event of the death of this person, future earnings of the business may be at risk. Also impacted are investments, credit, and the "good-will" of the business. The cost for the business to replace an individual can require an extensive and time-consuming search, often with the expenditure a great deal of resources.
In the case of a new company, occasionally an estimate can be made of the value of the key person's relative contribution in organizing the business, securing financing and planning future operations. In many instances, however, the underwriter must depend on considerations of the individual's background and experience, as well as the economic track record. Since a significant percentage of new businesses fail in the first few years of operation, key person underwriting should be more conservative for new enterprises.
Factors evaluated for key-person coverage include:
•Analysis of an individual's and the company's track records
•The ability of the key-person to secure needed financing for the business
•Special skills or talents in the individual's occupation
•Examination of the financial position of the business
•The age of the proposed insured, and the number of years of employment remaining. Key-person insurance becomes speculative over the age of 60 since most organizations will have a successor plan in place by this time.