Needs Based Investment Advice

Needs Based Investment Advice






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The client's brief:


Convert 127 A4 pages of text (without any images!) into an interactive on-line tutorial.


The end product consists of 222 interactive screens and over 250 (mostly composite) graphics.

This was the 7th project for FNB.

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Page 11 of 13

  (9-pg Interactive Demo)


Table of




Click on these Topics:

Definition of Key-Person

Insuring against Loss of Key-Person

Establishing the Value of

a Key-Person

Policy Payout


Definition of "Key-Person"


Certain employees are often crucial to the success of a business and losing such a key individual would negatively impact on the business and its owners. A key person is anyone who significantly improves the profitability and effective management of a business.


For example, a key person is someone who:


        has specialist, expert skills vital to success in your industry.

        attracts and retains competent staff members.

        increases the creditworthiness of the business.

        builds goodwill for the business.

Insuring against Loss of Key-Person


Death and disability are unfortunately a reality of life. It is therefore necessary to plan and provide for the necessary funds to overcome the negative impact caused by such a loss. The possible impact on the business could be:

        A slowdown in turnover.

        Decline in profitability and/or sales.

        Stricter terms from suppliers.

        Difficulty in raising finance.

        Loss of expertise.

        Delay in finding and the high cost of hiring a successor.


The solution is to insure the life of a key employee for the purpose of compensating the business for the loss of income that it would suffer in the event of that employee's death or disability. Key man insurance can then be used to absorb disruptions to the business and provide funds to recruit and train a suitable replacement.

Establishing the Value of a Key Person


It is true that there is no formula or set of rules to determine the value of a human life. For insurance purposes, however, the amount of key person cover is usually determined using one of the following methods:


        Seven times the annual salary of the key person;


        The estimated number of years that it would take for a replacement to reach the key person's present level of profitability, multiplied by the drop in profits as a result of the death or disability of the key person;


        Itemising the costs involved in replacing the key person. Such costs could involve the actual cost of replacing the key person; the key person's worth in terms of net profits; the cost to the business if the key person were to die or become disabled today or the degree to which the business wishes to protect itself against the loss that would be sustained upon the loss of the key person.


Policy Payout


On the death or disablement of the key person, the insurance policy then pays out to ensure:

An interim cash amount for recruiting, training and/or development of new employees.

The continued existence and development of the business.

That existing/potential contracts are not affected.

That the creditworthiness of the business is not affected.