Securing Business Continuity: Key Man Insurance Strategies for High-Net-Worth Enterprises

Read Time: 5 Minutes

As an advisor specializing in high-net-worth insurance solutions for businesses, I've seen first-hand how crucial it is to plan for the unexpected. One of the greatest threats facing any successful enterprise is the potential loss of a key leader, partner, or vital employee. Their absence can disrupt operations, stall growth initiatives, and even jeopardize the entire future of the company. That's why key man insurance is such a critical risk management strategy that no business can afford to overlook. While there are many tools that can be used for key man coverage such as term or permanent insurance, we find that permanent insurance for a company who has liquidity may offer more long term benefits that go beyond just the coverage in a “what if” scenario.? These benefits include access to liquidity from cash values as well as opportunities for building long term retention benefits for key peoples families.

?

In my many years of experience, I've worked with business owners across industries to implement comprehensive key man coverage. Time and again, I've witnessed the peace of mind it provides knowing that the company's financial interests and transition plans are protected, no matter what uncertainties may arise. Allow me to illustrate with a recent case that highlights the power of this approach.

?

Recently, I assisted a tech manufacturing firm that had grown rapidly to a $250 million valuation. Despite their success, they lacked a formal succession plan, leaving them vulnerable to the untimely departure of key executives. With most tech companies, the success of the company is cantered around a founder’s vision and a technical officers domain knowledge. A loss of one or two of them would mean disaster for the company and its investors. To address this, we proposed a customized key man insurance strategy, securing $30 million in coverage on the lives of the CEO and CTO.

?

The policies we structured achieved multiple objectives. Firstly, they provided immediate cash benefits to cover expenses related to temporary leadership, recruiting replacements, and maintaining investor confidence. Secondly, the policies accumulated cash values on a tax-deferred basis, creating a pool of funds accessible to the company for various needs while the key people were still active.

This case exemplifies how key man insurance can neutralize risks and unlock financial opportunities for businesses. It guarantees business continuity while providing cash flow and flexibility for succession planning.

While we talk about the need for key man insurance, in order to execute a plan effectively, it is important to determine a plan on how you walk a management team through implementation.? There are two approaches to consider, a final benefits approach or a cash affordability approach.? Since life insurance pricing vary based on age, gender, and health status, equal premium payments on two executives will yield different death benefit amounts.? So it is important that a management team knows a clear strategy for considering a key man / executive retention package.

?

One question that comes up often is how do you determine a suitable value? The three most universally accepted methods in valuing a key person are:

1. Use a multiplier times the Total Annual Remuneration Package

• Ages 18-60 – up to 15x
• ?Ages 61-70 – up to 6x

2.?6x the average net profit over the past three (3) years, or 3x the average gross profits over the past three (3) years

3. For Investors, up to 70% of the capital injection, and usually IC

?

Of course, no two businesses are alike, which is why a formulaic approach to key man insurance simply won't suffice for high-net-worth enterprises. As a trusted advisor, I invest heavily in understanding each client's unique core strengths, vision, and growth trajectory. Only through this acute awareness can I begin structuring a bespoke coverage solution that leaves no liabilities while maximizing the strategic advantages of key man insurance.

?

In the high-stakes world of business, the unplanned departure of key leaders can have severe consequences. Don't let your client's hard work and life's passion be jeopardized. Key man insurance is a powerful tool for mitigating risk, reinforcing financial stability, and securing the future of their enterprise.

?

I've dedicated my career to elevating insurance as a value driver for high-net-worth businesses and their visionary leaders. It's immensely rewarding to leverage my expertise in architecting solutions that secure legacies, empower dreams, and provide unshakeable continuity, no matter how turbulent the tides may become. If you have key people propelling your enterprise forward, their protection should be of paramount priority.

Anil Madnani

Sales Director, MENA