“Running a successful business means dealing with tough issues – and preparing for the unexpected is one of them” – Canada Life
Each employee is important to the success of any business but there are often particular employees without whom the business would struggle to function.
Key Person Insurance is a way of protecting your company in the case of an irreplaceable employee either passing away or suffering from a critical illness, ensuring the business can deal with the financial shortfall.
Research shows that 46% of UK businesses would be forced to cease trading immediately if a key person died or was unable to continue working through illness or injury.
In this article, we reveal 8 ways that Key Person Insurance can benefit businesses. But first, we’ll briefly explain how it works.
Looking for professional help finding the best employee benefits and insurance policies to support your staff? Contact our team of impartial experts at +44 (0)1273 974419 or fill in the right-hand contact form.
What is Key Person Insurance
Key Person Insurance (also known as ‘Business Protection Insurance’ or ‘Key Man Insurance’) is a form of coverage which allows a business to protect itself financially in the event of losing a vital member of the team due to terminal illness or death.
An employer will receive a lump sum cash payment in the event of a successful claim. This insurance policy is paid for and owned by the employer, meaning that the payment goes directly to the business.
Key Person Insurance benefits any company that relies heavily on one or more individuals and the process of claiming is also relatively simple.
The process of taking out a policy is three-fold:
- An employer nominates a key person
- An employer then takes out Key Man Insurance on that specified employee
- An employer will pay for the premiums and becomes the beneficiary if there is a successful claim
Who is a key person?
A key person is an individual whose loss would lead to the biggest financial shortfall. For many small businesses, it is often the owner who holds the company together. For larger businesses, it might be the Chief Executive or a sales leader.
Whoever it is, their financial value must be calculable, whether that’s due to their leadership skills, specialist knowledge, skillset, experience levels or creative nous etc. Typically, they will be one of the following:
- Sales leaders
- Technical staff
- Creative talent
8 ways that Key Person Insurance benefits your business
Research from Legal & General revealed that 52% of businesses would have to stop trading less than a year after the death or critical illness of a key individual. Key Person Insurance is specifically designed to stop this eventuality.
Key Man Insurance benefits a business in the following ways:
1. Protects against loss of profits
One of the most obvious drawbacks of losing a key team member is reduced income resulting from their loss. A typical example would be a highly knowledgeable and exceptional salesperson whose absence would lead to an immediate shortfall of income. But it could also be a CEO.
2. Finances recruitment and training of a replacement
It’s not just about covering the immediate downturn in profits. You will also need to find a replacement This might require the retraining of a current member of your team or looking externally. Either way, it’s going to require financing. Exceptional talent will require an exceptional replacement. However, if you do it, you will need to have money to invest.
3. Safeguards against the loss of important business contacts
Businesses often depend on personal contacts. A CEO may have existing relationships through which much business is directed. Without that link – and without access to their contacts book – business may well be lost. Indeed, those contacts may have a verifiable value and that loss can be covered within a Key Person Insurance scheme.
4. Covers the cost of losing customers and suppliers
If the success of a product or service is reliant on the reputation of a singular person, then you may be vulnerable to customers and suppliers looking elsewhere. As above, personal relationships may also have a role to play here. But most of all, if they experience a sudden disruption in the smooth running of the business – payment delays, sluggish email responses, inability to find someone to solve their problem – this will be sure to see some industry partners and customers go elsewhere.
5. Funds the cost of repaying outstanding loans
One of the biggest benefits of Key Person Insurance is that it can cover loan repayments which may be affected by all the above factors. So, it’s not just a short-term downturn in profits alone which is a problem, it’s how it affects a company’s ability to cover debts and loans.
6. Protects against the loss of goodwill
Some individuals have such a powerful presence and reputation that they almost ARE the business. This impacts on public relations and, crucially, the ability to attract fresh investment. Again, Key Person Insurance benefits the business by covering the potential shortfall.
7. Alleviates the financial stress, allowing you to focus on the human impact
We’ve talked a lot about the financial implications. But the loss of a key person through critical illness or death would be incredibly stressful for very human reasons. At least, by having the financial situation covered, you can attend to the people around you who may also be affected.
8. Indirectly protects the futures of other employees
If the business fails due to the loss of a key person, then everyone suffers. So not only does it financially protect the business, it also protects the finances of the people who work for it.
“If Key Person Insurance benefits the business, it benefits everyone.”
Discover the best protection for your business
As you can see, Key Person Insurance benefits those companies that are highly dependent on one particular individual. If that’s true of your business, then it might be worth setting up a chat with one of our expert advisors to find out more about how the policy works and source FREE quotes tailored to your circumstances.
Contact us at Engage Health Group Ltd or call +44 (0)1273 974419 for FREE no-obligation advice and support.