Calculating the value of protection required
The sum assured required is that which will accurately reflect the impact that the loss of the individual will have on the company's profits and/or capital position. Methods most commonly used for this purpose are outlined below:
Multiple of salary – Most appropriate where the aim is to buy replacement cover
A simple method based on a multiple of the key person's salary, usually somewhere between 5 and 10.|
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Sum assured required
£0.00
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Cash flow – Relevant where the individual's absence is likely to have an impact on the cash flow of the business
This method is designed to reflect the impact the individual could have on cash flow. It should be noted that it is reliant on the individual's remuneration being reflective of his or her contribution. Furthermore, the recovery period, however valuable to the individual, should rarely extend beyond three years.
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| £ | Sum assured required £0.00
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Multiple of profits – Most appropriate where the loss of the individual will affect profit
As well as being a formula related to the replacement of profits, this can also be used where the individual's salary, perhaps because they are a shareholding director, does not fully reflect their contribution to the business.
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| £ | Sum assured required £0.00
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* This could be averaged where appropriate
There may be additional cover required to meet a potential capital loss, i.e. the repayment of a loan, however the value of this should be self-evident.
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