What is key person protection?
While every member of your business has their own role to play that is difficult to replace, there are certain key personnel whose absence has an immediate impact on the running of your business.
Key personal protection, sometimes known as key man insurance, is in place to protect your business against the financial loss of key personnel. 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.
When you work with your key personnel every day, it can be difficult to really understand just how important they are to 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 the right 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 protection?
One of the most important assets a business has is its staff. 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 protection 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.
Just as we routinely insure key assets, such as property and machinery, it is extremely important that key personnel are also taken into account for the survival of your business.
What levels of key person protection are available?
There are multiple levels of key person protection and it’s important to determine what level of cover is right for you.
You can work out what’s needed 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.
If you choose to work with PKF Francis Clark Financial Planners to organise your key person protection, we will be able to work with your business closely. This will give us all the tools we need to make sure we can recommend the right level of cover for your needs and the best way to calculate it.
How does key person insurance work?
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 personnel from being able to work and contribute to the business, as well as cover the death of key personnel.
Once you have organised the right level of 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 insurance provides a level of stability and relief to the company during this time.
Key Person Protection from PKF Francis Clark
We provide a number of business protection solutions, if you have more questions about key person protection and would like to know how it can help your business, a member of the PKF Francis Clark financial planning team would be more than happy to assist you. Call us on 0800 832 1785 on weekdays 9-5, or drop us an email anytime at [email protected] where someone will get back to you as soon as possible.
If you’d prefer an in-person meeting, we have a number of offices across the South West of England. You can visit our contact page to find out more about our offices and directions.