Key Person Insurance Cost - Benefit Analysis

A thriving technology start-up, recognises the critical importance of its key personnel to its ongoing success and financial stability. To mitigate the potential risks associated with the loss of key individuals, they decide to explore key-person insurance options. With the guidance of an experienced independent insurance advisor, they evaluate a policy with an annual premium of £64,786 over a 5-year term that provides a lump sum payout of £2 million in the event of the loss of a key person.

They decide to conduct a cost-benefit analysis to evaluate the potential financial impact of implementing Key Person cover.

1. Identifying Key Personnel

The company identifies three key individuals who play vital roles in the business's operations and revenue generation:

CEO: John (Age 60), CTO: Sarah (Age 50), and CSO: Mark (Age 55).

2. Assessing Financial Impact

Based on a thorough analysis of the company's revenue streams and the contributions of each key person, it is estimated that the loss of any key person would have a significant impact on the company's financial performance.

• Estimated annual revenue: £5 million.

• Loss of CEO: Projected revenue loss of £2 million per year

• Loss of CTO: Projected revenue loss of £1.5 million per year

• Loss of CSO: Projected revenue loss of £1 million per year

• Cost of hiring and training replacements: Estimated at £500,000 per key individual.

3. Evaluating Key Person Insurance

The insurance advisor presents a Key Person insurance policy with an annual premium of £64,786 over a 5-year term, offering a lump sum pay-out of £2 million in the event of the loss of a key person due to a serious illness or unfortunate death. This coverage is tailored to the revenue contributions and replacement costs associated with each key person.

4. Cost-Benefit Analysis

In this scenario Key Person insurance policy:

Total Premiums = £64,786 * 5 = £323,930

Possible Loss of profits in case the insured risk occurs - £2 million.

Total Pay-out in case of a claim = £2 million

This indicates that the financial protection provided by the insurance coverage far outweighs the premium costs and added peace of mind – priceless.

5. Implementation and Regular Review

With this analysis and recognizing the critical importance of their key personnel, Innovix Solutions decided to proceed with the Key Person insurance policy. The policy is implemented, and the agreed-upon premium payments are made over the 5-year term. 

Regular reviews are scheduled to ensure that the coverage remains aligned with the company's evolving needs and any changes in key personnel.

Conclusion

Through a comprehensive evaluation of their key personnel and the associated financial risks, the company makes an informed decision to invest in Key Person insurance. By safeguarding against the loss of key individuals, Innovix Solutions can enhance their business continuity, ensure financial stability, and provide peace of mind to stakeholders.

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