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Many small and medium-sized UK businesses are owned and/or managed by just a few important people. These are usually board members, the managing director, and executive officers, but they could also be other valuable employees. Responsible for major decisions and steering the organisation’s growth and development, these individuals are the essential ingredients that no business can do without. But what happens when these central figures are suddenly missing from the scene due to sickness, disability, or death? The potential for chaos and huge financial loss may grow exponentially, putting the organisation in a spin, or even causing the businesses to cease trading.
Fortunately, this is where key person insurance can step in to fill the void. Providing necessary financial support, it can cover the financial issues, and pay for interim leadership to turn an unseen loss or tragedy into a chance to build again.
Key person insurance (KPI), also known as ‘key man insurance’ or ‘key person protection’, is a type of business insurance that protects organisations from the financial impact of the loss of a key individual – men and women – who can no longer work due to major illness, or who have passed away during the term of the policy. Effectively, the business insures itself against the financial fallout from such an event, giving employees, suppliers and customers the confidence to know that the business will survive even if tragedy should strike.
Key person insurance is a life insurance policy, (plus optional critical illness cover), taken out to cover the life of a key person within your business. The policy is owned and paid for by the employer, so any pay-out is payable to the organisation.
The insurance can cover any individual in your company, and you can usually make a claim during the length of the policy if:
Important note: You must be able to demonstrate that your business would suffer a financial loss of profits in the key person’s absence in order to insure them as a key person.
Securing key person insurance on a business’ important employees is relatively straightforward: The company purchases life insurance on certain employee(s), pays the premium, and is the named beneficiary of the policy.
In the event of the insured person’s death or incapacitation, the company receives the policy’s benefit as a cash sum. This money can be used to cover the costs of recruiting, hiring, and training a replacement for the deceased person, or, if the company believes it can no longer continue trading, the funds can be used to pay off debts, distribute money to investors, provide severance benefits to employees, and close the business down in an orderly manner. Key person insurance gives the company options other than filing for bankruptcy.
Important note: Critical Illness Cover can usually be added to the life policy – at extra cost – which will also pay out if the covered employee(s) are unable to continue working due to long-term illness.
Key person insurance works like any other life insurance policy – the insurer will review the health records of the individual(s) to be insured to estimate the risk of their death or incapacitation. If the person has a poor health history, it may not be possible to secure key person insurance, or the premium that’s offered may be expensive.
Key person insurance can cover the business from different types of risk. Common usages include:
This insurance offsets lost income from lost sales, or financial losses resulting from the delay or cancellation of any business project involving a key person.
The surviving shareholders or partners use the insurance funds to purchase the financial interests of the deceased person.
The value of the insurance coverage is to equal the value of the bank guarantee or the limit of the overdraft facility, protecting the lender from loss in the event of the death or incapacitation of the insured person. (Some banks may automatically ask for this type of protection before granting any loan or borrowing facility).
Key person insurance can be used to cover the life of the business owner, top executives, or any other individual considered vital to the business.
Tragedy can strike without warning, so if your business is growing and its success and future stability are centred on the performance of just a few individuals, you should take out key person insurance sooner rather than later.
Keep in mind that start-ups and small businesses are particularly vulnerable to the loss of key individuals, but even larger businesses can run into trouble if important people suddenly vanish from the scene. Simply ask yourself, what would happen if those individuals were no longer working in the business. Could you cope, or would it be a problem? If your answer is the latter, then key person insurance is right for you.
Most business success is based on stability – maintaining a steady growth trajectory without too many bumps and dips. This means reducing risk and having a financial backstop in the event of unexpected problems. If your business is heavily dependent on the performance of a few individuals, and their loss would impact profits, contracts, even loans and guarantees, you should consider key person protection to eliminate the risk.
Key person cover can be applied to any individual in the business where the loss of that person would have a major impact on the organisation’s performance. This can mean individuals from many different roles, including:
The cost of key person insurance depends on the size and nature of the business, the key person’s role, and the potential loss that may occur if they were to stop working for the company. A variety of other factors, such as the health of the key person, their gender, their age, the type of policy, and the amount of coverage you buy will also affect the premium you pay.
Top tip: The cost will also depend on whether the company buys a Term Life Policy or a Permanent Life Policy. Term Life is almost always cheaper.
All business involves risk, but that doesn’t mean you have to suffer the consequences if tragedy should strike. Contact Swoop today to discuss all your key person insurance needs. Don’t let the loss of important individuals also mean the loss of your company.
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