Key person insurance

When considering financial planning, we often think about ourselves and our families. We protect against an untimely event that may adversely affect our families. But why then, do we not do the same for our businesses? It seems important then to consider insurance that might help decrease these risks. 

Many small and medium sized businesses are usually dependent on a few people who play a fundamental role within the business, but little consideration is given to what might happen if such an individual was lost to the business, either through death or critical illness.

What is key person insurance?

It is a type of insurance policy taken out on someone who is key to the success of the business. The policy is intended to replace the income that the insured would have brought to the company had their death or illness not occurred. 

What is the role of the key person & who might they be? 

A key person can be anyone employed by the business that, should they be unable to carry out their duties suddenly for an extended period, the business would suffer. A key person could be:

  • A leading sales person or someone with important contacts
  • A leading negotiator or specialist,
  • Someone running the business on a day-to-day basis
  • Anyone controlling a special project or who is crucial to some research
  • A person who's record ensures favourable treatment from lending institutions. 

Reasons to consider key person insurance

There are a number of reasons to consider this type of insurance, it can:  

  • Help you maintain the level of income that was usually generated by the individual and enable you to cover business expenses. 
  • Cover lost profit, lost business opportunities and breakdown of relationships as a result of the key person no longer being available.
  • Enable the business to continue to function for an extended period where the key person is unable to work, but has not died.
  • Help fund any recruitment fees and the training required for a replacement hire.
  • Provide more favourable terms with lenders since this demonstrates a continued ability to meet commitments.
  • Maintain cash flow for short-term financing needs.
  • Protect existing shareholders and partnerships if the family was due to inherit shares in the business. The liquidity the insurance pay-out provides will allow the remaining shareholders or partners to possibly buy the shares from the family.

Types of policy 

What is level term assurance?

‘Level term assurance’, or simply ‘term assurance’ provides a chosen level of financial protection for a certain period of time. It is one of the simplest and most common forms of individual protection on the market. It pays a tax-free lump sum on death only to the stated beneficiary. E.g. You could be covered for £100,000 over 25 years. 

The cost of premiums depends on variables, such as age, health, amount covered and length of term. The other common alternative is decreasing-term assurance, which is usually linked to a lowering mortgage amount. 

What is critical illness cover?

Critical illness cover insures a person if they are diagnosed with a disease such as cancer, multiple sclerosis or Parkinson’s, or if they suffer a heart attack or stroke. Providers have their own lists so it is important to check when comparing. Given that an individual is more likely to suffer an illness than suddenly dying, it makes sense to insure both the life and the health of a key person, however as it is more likely, the cost of critical illness cover is much higher and for that reason alone, often neglected. 
 

How can we help?

We provide bespoke services to each of our clients’ specific requirements and we help business owners of varying sizes across many industries find solutions to help protect their business’ financial future. We have access to the whole of the market to help you find the most suitable policy to meet your specific company’s needs.

For help with your business planning and insurance needs, get in touch and arrange a free initial consultation with an adviser who will be able to give you more guidance.

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