How Much Key Man Insurance Do We Need?
Question asked by Raymond Stiller
I’m in the process of setting up a Death in Service insurance scheme for my workers.
Some of my employees already have personal Life Insurance. Does this matter and will a new Group Life Insurance policy affect my workers’ personal Life Insurance policies?
Are they allowed to have both types of Life Insurance and are there any limits to cover?
Thanks for your question!
It’s really common for employees to already have personal Life Insurance before a business sets up a Death in Service scheme for them. We therefore come across this scenario a lot.
Group Life Insurance tends to be limited to a multiple of salary, for example three or four times an individual’s gross annual earnings.
While this is a great benefit to have, it may not always be sufficient. Could a multiple of three times your salary both pay off your mortgage and support your family financially until your children are independent, for example? It’s likely the answer is no.
For this reason, it’s common for people to hold both. Group Life Insurance is a ‘nice to have’ benefit free with work. Meanwhile, a personal Life Insurance policy can top up a group scheme.
Remember, Death in Service is linked to the company. That means when employees move on, company-provided Death in Service Cover ceases. This is another reason why it may be actually be sensible to have some element of personal Life Insurance independent of work depending on the employee’s circumstances.
For a Death in Service scheme, the typical limit is ten times salary or up to £1.5 million depending on the insurer.
For personal Life Insurance, limits will be insurer-dependent. However, most insurers don’t have a specific threshold. The amount of Life Insurance is based on an ‘insurable interest’ test. Another test is whether the client can afford the premiums.
Insurers are fairly happy to cover people with a combined total sum insured across all Life Insurance policies of £1 million.
After this, insurers may begin asking financial questions to determine whether the life cover employees hold is excessive. This said, if the sums can be justified there’s not usually a need to be concerned with this additional administrative step.
On an individual policy, you may be asked how much Life Insurance you already have in place, in which case you’d have to mention Death in Service scheme.
However, if the Group Life Insurance scheme was set up after the personal Life Insurance scheme, there’s not usually a need to contact the personal insurer to say you now have additional life cover in place through your employer.