Research shows that 54% of small business owners don’t have adequate insurance in place to protect their company against the sudden loss of a key employee; 20% of company owners didn’t even know key person insurance was something you could get.
Yet, according to statistics, 46% of UK businesses would be forced to cease trading immediately if a key person died or was unable to continue working through illness or injury.
What is it?
Key person insurance (also known as key man insurance or key person protection) is an insurance policy a business can take out to protect itself against financial loss due to a key person in their business dying or being diagnosed with a critical illness.
Key person cover is term insurance and will pay out a cash lump sum if the named key person dies or becomes critically ill within the term of the policy.
How do you define someone as a key person?
A key person would be defined as someone who plays a vital role in the financial success of a company. It may be a founder or the person who sets the business strategy, or a top salesman responsible for bringing in profitable business. It might even be your technology guru who knows things no-one else in the company understands.
How does key person insurance work?
Key person insurance is either a life insurance or life insurance and critical illness cover policy which a business takes out to protect the life of a key employee within their company. Owned for, and paid by the employer, any claim made against the policy will be paid out to the employer.
It works like this:
The company takes out life insurance or life and critical illness insurance on the key employee
The company pays for the premiums and is the beneficiary of the insurance policy in the event of a claim being made If the insured employee dies within the term of the policy (or is diagnosed with a critical illness if this is also insured), the company will receive the pay out of the sum the employee was insured for.
What is the purpose of this kind of life insurance?
Key person cover is designed to protect a business that may be reliant on one, two or several key employees. With sufficient protection on key staff, a company will have the money to fund sick pay and recruit new staff and have funds available to protect against any wider impact the loss of an employee may have on the business.
The death of a key person, particularly in a small company, can cause catastrophic consequences for a business. Key person insurance is designed to help the company survive the loss of any person who is key to making the business work. The proceeds of a key person insurance policy can be used to cover expenses incurred by the loss of the key employee until it can find a suitable replacement candidate.
In the absolute worst case scenario the cash can be used to pay off debts, distribute funds to investors and close the company down. In some circumstances, although it’s brutal, key person insurance could protect a small company against bankruptcy.
Benefits of key person cover
The primary benefit of key person cover is the peace of mind it can bring. Should anything happen to you, or the key employees of your company, the effect on the business will be significantly lessened due to the financial cushion provided by adequate key man insurance.
If you take out a business loan, the bank may require you to take out key man cover to protect the business loan. This provides the lender reassurance that the loan will be repaid should the person, or people, most crucial to the success of the company suddenly no longer be around.
Some policies also allow you to add an option to protect any loss in profits or the costs you will incur in replacing a lost employee.
Who needs it?
All businesses, however small businesses are far more likely to have one or two significantly important people who the business relies on to succeed. Key man insurance is often overlooked by small businesses who tend to need it most.
For example, small businesses are more likely to have an involved founder, without whom ideas and crucial leadership would be lost. The loss of such a person could damage the ethos of a young business which may not have the resilience to sustain the blow, without a financial boost to help cushion the way to safe, profitable ground.
Where to get it
There are over 200 insurers in the UK offering protection insurance for business, navigating the terms, cover and costs can be daunting to say the least. We do it all for you, we are the experts, we do not charge you a fee to source and deliver the right solution for you and we have over 30 years experience.
Just get in touch..