Key person insurance
What is key person insurance?
Key person insurance, sometimes known as key man insurance or key person insurance protection, protects your business from financial loss in the event of losing key people through critical illness or death.
Life insurance will be written to cover the life of a key worker who is responsible for significant revenue generation to ensure a cash injection for the business should they be lost through a critical illness or death.
While every member of your business has their own role to play that is difficult to replace, there are certain key people whose absence has an immediate financial impact on the running of your business. Research has found that 46% of businesses in the UK would have no choice but to stop trading immediately if they lost a key member of their team, either through long-term illness, sudden injury or death.
Losing a key member of your team is always emotionally difficult for a business and can be an incredibly stressful, worrisome time. Looking at key person insurance will at least ensure your business is able to financially recover and maintain stability for other team members.
Why does your business need key person insurance?
One of the most important assets a business has is its employees. After all, your staff bring specialist skill and knowledge, experience and industry contacts that cannot be replicated. These key people are absolutely essential for profit making and losing them would have a massive financial impact on your business.
Losing a key member of your team would result in your business suffering significant financial damage, including a reduction in profits, the inability to fulfil critical commitments and the cost of recruiting a suitable replacement.
Key person insurance is designed to give you cover if key personnel in your business suffer from a critical illness that means they’re unable to work, or in the worst-case scenario pass away. It provides peace of mind for all business owners
What levels of key person insurance are available?
There are multiple levels of key person protection. You can work out what key person insurance is needed by your business in a number of ways:
- Calculate the salary of your key personnel as a percentage of your businesses total payroll. You then multiply this by sales turnover and multiply this number by the number of years you forecast it will take the business to recover.
- By using a multiple of the key person’s total remuneration package, often a multiple of five times is used. This will not take into consideration the key person’s contribution to your businesses overall turnover.
- In smaller businesses with only one key member, or when there are only a very small number of team members considered key personnel, a multiple of the businesses profits can be used. It’s most common to use a rate of two times gross profit.
FAQs about key person insurance
Key person insurance can cover against a multitude of situations so you need to decide what your business thinks is worth insuring.
Life assurance only: this only covers the death of a key person and won’t cover critical illness or injury.
Life assurance and critical illness cover: This will cover critical illness or any injuries that stop your key people from being able to work and contribute to the business, as well as cover in case of their death.
Once you have organised the appropriate level of key person protection for your business, in the unfortunate circumstance you need to, you will be able to make a claim.
Losing key personnel is always difficult for any business, but taking out the right key person insurance helps to mitigate risks and provide a level of stability and relief to the company during this difficult time.
Key person protection provides a business with a financial cushion in the event of the death or disability of a key person.
The proceeds can be used to cover financial losses that may result from their absence, such as the cost of finding and training a replacement, compensating for lost business opportunities, or paying off debts.
Key person insurance is typically purchased for individuals whose skills, knowledge, experience, or leadership are crucial to the success of a business. This could include executives, founders, or individuals with specialised expertise.
Eligibility for key person insurance is determined by the impact the person’s absence would have on the company’s operations and financial stability.
While business insurance policies cover property damage, liability, and other general risks, key person insurance specifically addresses the financial impact of losing a key individual within the organisation.
Key person insurance is a form of life and disability insurance tailored to protect the business rather than the individual. It helps to ensure continuity, stability, and financial resilience in the face of unexpected events involving the key people in your business.
How can we help?
Get in touch for advice about key person insurance from one of our qualified financial planners.