How does Key Man Insurance work?
by Yolandi Janse van Rensburg on 21/05/10 at 9:42 am
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One of our Ideate readers contacted us with a question on Insurance and since we are always eager to please our super smart readers we asked our Finance Coach Gareth Cotten to do some investigating and share it with all our readers!
O
ur reader asked: “can you please answer some questions about Key Man Insurance for me? If you pay Key Man Insurance on R5m and your company is valued at R1m, would the full payment of R5m be made? Is this payment going into the company or to a business partner personally, i.e in the case of a 50/50% partnership?”
So, Gareth dusted off his inspector hat, took his old pipe out of the closet and phoned up his Insurance expert, Craig Yeats at Enriching Life Financial Services. After breaking into offices late at night and interviewing dodgy one-legged men in dark alleys, Gareth and Craig found the answer they were looking for:
“Key Man Insurance is Life Insurance put in place by an employer on the life of an employee who is a Key Person in the running of the business. This person is usually someone whose services and knowledge are instrumental in contributing to the profits of the business. If the Key Man Policy is valued at R 5m and your Company is valued at R 1m, the amount of R 5m would be paid out in full in the event of death or disability. The full R 5m would be payable to the company, not to the business partner. Financial Underwriting will take place at inception of the policy being taken out and the underwriters will dictate how much cover will be granted. As a general rule of thumb 7 times annual salary will be used to calculate the sum assured however there are other valuation methods which take the company’s net profit into account. Normally the 50:50 split pertains to a Buy-and-Sell agreement which dictates the sale of shares upon death or disability.”
Thanks Gareth and Craig for a job well done! The problem has been solved and we’re all a bit wiser once again. Just another day at the Ideate Headquarters where we work day and night to satisfy our eager-to-know-more readers’ appetites!
Yolandi Janse van Rensburg writes about social media, marketing, life and, of course, cars. We say “of course” because Yolandi is nuts about anything on 4 wheels and runs Autofemme, a blog about cars. Our Ideate sub-editor is also the Heavy Chef girl at World Wide Creative. You can follow her on Twitter @Yolandi_JvR View more articles by Yolandi Janse van Rensburg.
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