Key Person Insurance

Financial protection for your business

When a key person in a business dies or becomes seriously ill it can have a devastating financial effect. This insurance can offer invaluable financial support.

As advisers, we are increasingly working with CLA Members to consider ways that they 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.

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What is Key Person insurance?

Key Person Insurance, sometimes known as keyman insurance, is a type of life insurance that protects your business from the financial fallout caused by the unexpected death or serious illness (when Critical Illness Protection is included in the policy) of an indispensable employee.

Usually, business owners choose to cover those with particular skills, expertise or responsibilities. If you are the owner, founder or managing director, you’re likely to be a key person

The proceeds from the policy are paid directly to the company, helping you to protect your profits or clear business debt to continue trading as normally as possible.

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 small to medium sized 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, typically starting at £250k and exceeding £10m in certain circumstances.

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.

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.

Benefits for your business

  • Your business receives valuable financial support following the loss of essential employees.
  • 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.

Benefits for your employees

  • Combined with the benefit of group life insurance, key person insurance lets your employees know that they are valued.

Budget considerations

  • It’s usual for sums between £1m and £20m to be assured.
  • Your premium will also depend on the employee’s age – it will typically be higher for a person aged 60 than it would be for a person aged 40.

Key Person Insurance with Critical Illness cover

You may wish to consider adding Critical Illness cover to your Key Person Insurance. This means that your business benefits from the same cover provided in the event of a key person’s death should they be diagnosed with a serious illness.

This is because, when a key person becomes critically ill, the hole left in the business is often the same as if they had died. The insurance is designed to fill that hole and prevent tragic circumstances from causing bankruptcy or other financial hardship.

As with Life Only Key Person Insurance, your business is the beneficiary and not the employee’s family.

 

Benefits for your Business

  • Your business receives the same sum as would be provided in the event of key person’s death if they are diagnosed with a serious illness.
  • 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.

 

Benefits for your employees

  • A key person with a serious illness may feel guilt that their situation is damaging the business and they may even try to continue to work. Having critical illness cover in place allows a seriously ill key person to focus on their own health rather than the health of the business.

Budget considerations

  • Adding Critical Illness cover increases the cost of premiums compared to Life Only cover.
  • As with Life Only Key Person Insurance, the premium rises with the age of the person insured.

Find out more

To find out more or to discuss your options in more detail, the expert team at CLA Healthcare are on hand to help.

Call 01274 717361 or email healthcare@cla.org.uk to find out more.

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