Key Person Insurance

Key Person Insurance

What is a Key Person?

A key person, in the context of a business, is an employee whose skills, knowledge, experience, and overall contributions are vital to the company’s success and profitability. This individual often holds a crucial position and their absence would significantly impact the business’s operations, revenue, and stability.

Key persons typically have unique expertise, strong client relationships, or leadership roles that are not easily or quickly replaceable.

Examples of who a Key Person could be include business owner, director, salesperson or any employee with specialist skills or expertise.

What is Key Person Insurance?

If your business was to lose such a key person, could they really be easily and quickly replaced?

Key Person Insurance (also known as Keyman Insurance) is a type of policy designed to protect a business against the financial loss that may occur if a key employee, whose skills, knowledge, and contributions are crucial to the company’s success, becomes unable to work due to death, terminal illness, permanent disability, or critical illness.

This insurance provides a financial pay out that gives the business breathing space to continue without financial hardship.  It can be used to cover the costs of finding and training a replacement, offset lost revenue, and maintain stability and confidence among customers and employees. The goal is to reduce the impact of the loss on the business’s operations and financial health.

Why is Key Person Insurance important?

Your staff are your biggest asset and Key person insurance protects those who make your business successful! Research carried out by Legal and General showed the following:

• For 63% of businesses, the death of a key employee or owner would have the biggest impact on their business.

• 70% of SME’s would cease trading within 2 years with the death/illness of a key person.

• 52% of SME’s would cease trading in under a year after the death/illness of a key person.

• The chance of a heart attack or cancer before retirement age is greater than the risk of fire or flooding. Yet, many companies insure against water damage or a building burning down but overlook key person insurance.

• Many venture capitalists insist on Key Person Insurance before they will invest.

• Losing a key person can make banks nervous and may prompt them to freeze or call in existing loans. Clients and suppliers may also start to question your ability to deliver, reducing confidence in your brand.

Reasons to consider Key Person Insurance:

1. Financial Protection: It provides a financial safety net for your business in the event of losing a crucial employee, helping to cover lost revenue and operational costs.
2. Maintaining Business Continuity: The pay out from the insurance can be used to find and train a replacement, ensuring that your business can continue operating smoothly.
3. Preserving Stakeholder Confidence: Key Person Insurance can help maintain confidence among clients, suppliers, and investors, as it shows your commitment to stability and continuity.
4. Reducing Risk for Lenders: Banks and creditors may be less likely to freeze or call in loans if they see that you have measures in place to mitigate the risk of losing a key employee.
5. Protecting Company Value: A key person’s absence can affect the overall value of your business. Insurance can help protect that value by providing funds to navigate the transition period.
6. Coverage Beyond Death: Key Person Insurance often covers other critical situations, such as terminal illness, permanent disability, or critical illness, offering broader protection for your business.
7. Attracting and Retaining Talent: Having Key Person Insurance can signal to potential and existing employees that the company is secure and values its key personnel, helping with talent retention and attraction.
8. Facilitating Succession Planning: This insurance can be a crucial component of your overall succession plan, providing funds needed for a smooth transition in leadership.
9. Mitigating Emotional Impact: Losing a key employee can be emotionally taxing on the remaining staff. Insurance can help address the financial concerns, allowing the team to focus on recovery and maintaining morale.

Overall, Key Person Insurance is a proactive step to protect your business against unforeseen circumstances and ensure long-term stability.

Who Can take out Key Person Insurance?

If you own a business, such as being a director of a limited company, you can obtain Key Person Insurance with the consent of the individual being insured. It’s necessary to have a financial relationship with that person.

When should you take out Key Person Insurance?

If your business is growing, there is no specific right or wrong time to take out a key person life insurance policy. A start-up company may rely heavily on one or two individuals crucial to its success, while a larger company may have more resources and the capacity to replace key staff with other personnel.

However, established companies have higher overhead costs, so the loss of a key individual could seriously impact revenue. Each business is unique, but key employee insurance can offer a safety net for your company.

How Much Key Person Insurance do I need?

Businesses generally use three main factors to determine the level of coverage needed:

1. Cost of Replacement: Some roles are harder to fill than others, which may involve using specialized recruitment agencies and covering additional relocation expenses to find the right candidate. Estimate these costs to determine the appropriate coverage amount.

1. Wage-Based Formula: A common approach is to calculate life cover as up to ten times the key individual’s earnings, with a lower multiple for critical illness cover (e.g., up to five times their earnings).

1. Impact on Profits: Evaluate the key person’s contribution to gross or net profits and estimate how long it would take to recover from their absence. For instance, if a key salesperson generates 25% of your total sales, consider both the immediate impact and the time needed to regain their contribution.

Each of these factors helps in setting a coverage level that adequately protects your business against the loss of a crucial team member.  Here at The Mortgage Masters, we offer bespoke advice to ensure you get the right level of cover for your business.

How Much does Key Person Insurance Cost?

The cost of Key Person Insurance can vary based on factors such as the individual’s age, health, job role, coverage amount, and possibly even certain hobbies.  It also depends on whether you insure the key person solely in the event of their death, or whether you insure them against critical illnesses too.  Quotes from price comparison sites often aren’t useful, as they don’t account for your specific circumstances.

The policy you choose is meant to protect your business, not anyone else’s, so it’s important to find a policy that perfectly matches your needs.  Here at The Mortgage Masters, our experts can tailor their advice to ensure it bespoke to your business and needs.

Who pays the premiums for Key Person Insurance?

The company pays the premiums. The insurer will set up a Direct Debit to collect monthly or annual premiums from your business bank account.

Who gets the policy proceeds in the event of the claim.

As the policy is taken out by the business, the proceeds are paid to the business. From here, you will decide what to use the money for.

What happens if an employee leaves the company or retires ?

If a covered employee leaves the company, Key Person insurance does not cover that loss.  In that case, the insurer would cancel the policy.

How does Key Person Insurance differ from Life Insurance or Death in Service Benefit?

Key Person Insurance shares some features with life insurance and death in service insurance, but it also has key differences.  Unlike life insurance, which is intended for personal use, Key Person Insurance is tailored for businesses. Thus, if the insured key person dies, the lump sum payment goes to the company rather than the individual’s family.

Death in Service Insurance is an employee benefit provided by an employer, which pays a lump sum to the employee’s family upon their death. This coverage is typically based on a multiple of the employee’s annual salary.

Our experts here at The Mortgage Masters offer advice on a full range of business protection policies. We can ensure you get the right kind of policy at the right level.

Get in touch and see how we can help your business to survive the loss of an irreplaceable member of the team.