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A guide to keyperson protection

It is not something you want to consider, but how would your business cope if a key member of staff passed away?

A sudden death or long-term absence could have a huge impact on your business’ success. It’s important to be prepared for such a situation and the best way to do that is to have keyperson insurance in place.

What is keyperson insurance?

Keyperson insurance, also known as key man insurance is an insurance policy which a business can take out to protect itself against financial loss due to a key person in their business ether passing away or being diagnosed with a critical illness.

The cover is term insurance and will pay out a cash lump sum if the named person dies or becomes critically ill within the term of the policy.

How do you define someone as a key person?

A key person would be defined as someone who plays a vital role in the financial success of the business and whose death, critical illness, or disability would have a serious effect on the company.

It may be a founder or the person who directs the business strategy, your IT expert who has knowledge that no-one else in the business has, or a top salesperson responsible for bringing in the majority of profits.

In most businesses, there will probably be at least one person who will be regarded ‘key’ and should be covered by a suitable insurance policy.

What does keyperson insurance cover?

Keyperson insurance isn’t limited to cover the death of the individual. It can also pay out for an eligible critical illness or disability which prevents the person from working.

The pay-out might be useful to cover the costs of finding a replacement, funding the expense of employing a temporary replacement or replacing lost profits.

Keyperson insurance is sometimes required as a form of business loan protection. For example a bank might require reassurance that keyperson insurance is in place which would cover the repayment of a loan if a person who is deemed crucial to the business was no longer around.

Of course, different insurers and policies have exemptions so it’s important to make sure you are clear what the policy covers before taking it out.

How does keyperson insurance work?

Premiums are usually based on considerations in line with regular life insurance policies such as age, lifestyle and health. However, the business rather than the individual pays the premiums and the business is the beneficiary of any pay-out. Premiums are sometimes eligible for corporation tax relief, if certain criteria are met.

The cost of the policy will depend on the term as well as the level of cover and the amount of protection is usually calculated as a multiple of the individual’s salary or how much financial contribution they make to the business and how long it will take to recover. Also, of course the cost of insurance differs from insurer to insurer.

Does my business need keyperson insurance?

A primary benefit of keyperson insurance is peace of mind that should anything happen to you, or a key employee of your business, the effect on the business will be significantly lessened due to the financial cushion provided by adequate insurance.

Small businesses and family businesses can often have one or two significantly important people who the business relies on to succeed. For example, they often have an involved founder, without whom ideas and crucial leadership might be lost.

The loss of a key person in a start-up business could cause critical damage, without a financial boost to help pave the way to safe, profitable ground.

Keyperson insurance can provide financial assistance to see a business through a period of uncertainty in the aftermath of unexpectedly losing a crucial member of staff, helping your business to survive. Get in touch if you’d like further advice, email enquiries@cowgills.co.uk.

Disclaimer

The information was correct at time of publishing but may now be out of date.

Wealth Management
Posted by Matthew Bromley
2nd July, 2020
Get in touch with Matthew Bromley