When a key person in a business dies or becomes seriously ill it can have a devastating financial effect. As trusted advisers to CLA members, we are increasingly working with business members to consider ways that can look after not only their employees’ healthcare and wellbeing needs but also safeguard their business if a key employee should die or be diagnosed with a serious illness. This is where Key Person Insurance can offer invaluable financial support.
What is Key Person cover?
Key Person cover is life insurance, which can also include Critical Illness cover, taken out by a business on the life of someone crucial to the business. It protects your business from the financial fallout if a key member of staff dies or is diagnosed with a serious illness (if Critical Illness Cover is also included).
The proceeds from the policy are paid directly to the company or partners, helping you to protect your profits or clear business debt to continue trading as normally as possible
Usually, business owners choose to cover those with particular skills, essential expertise or responsibilities. If you are the owner, founder or managing director, you’re likely to be a key person.
Do you need Key Person Insurance?
When you’re deciding who to cover, it’s useful to ask yourself “what would happen if…?” You should consider whether you have any key employees that your business simply could not function without.
If you do have employees whose loss would cause severe disruption, or even closure, then Key Person Insurance is likely to be as essential as they are. It’s an especially important consideration for rural businesses that often rely on a small and loyal team.
How does Key Person insurance work?
In the event of a key person’s death or serious illness (when Critical illness cover is included), your business is the beneficiary, rather than your employee’s relatives. It is designed to provide funding for you to find a successor, or if it is unfeasible for your business to continue operating, provide the necessary funding for an orderly wind down.
The amount of cover is based on the key person’s earnings or their contribution to your profits. It is expressed as a multiple and it’s usual for sums between £1m and £20m to be assured.
The insurance premium will also depend on the employee’s age – it will be higher for a person aged 60 than it would be for a person aged 40. Adding Critical Illness cover increases the cost of premiums compared to Life Only cover.
Why buy Key Person Insurance?
- It can safeguard your business against the loss of essential employees.
- Serious illnesses are often long-term, so this cover means you will not have to ‘wait out’ the duration of an illness before your business receives the funding it needs.
- It provides you with the budget to hire a suitable successor.
- If you can’t hire a successor and you are unable continue operations, you will have the funding required for closure.