Some employees are indispensable to a business. This might be because the business is built around their unique talent, ability or personality. It might also be because they have vital knowledge, understanding how and why the business works. They alone might hold the crucial information that sets a business apart from its competitors. Such a person is, in business terms, a ‘key person’. Key person insurance is about creating a financial safety net, so the business can continue if they’re no longer there.
Filling a gap
The death of a key person in a company could leave a serious gap. No business should have a single point of failure but that is often the case.
Key person insurance is a life insurance policy in which the beneficiary of the policy is the business and the subject is a founder, key employee or company director. The policy is designed to pay out if the named key person dies. The business can then either continue without them or be wound up in an orderly fashion, with all debts paid and employees given appropriate redundancy pay.
In most small businesses, the key person is the owner. In some case, however, it could also be the company’s IT wizard, or an individual with advanced technical skills. There is no reason why you need to settle on one key person if there are several obvious candidates.
The important thing is to consider whether the business could continue if that person died and how much it would cost to replace them.
How much should a key person be insured for?
When deciding how much you need to insure them for, consider the annual turnover of the company and how far that person’s loss would affect it.
Also, think about the scenario that might follow. Would you wind the company down, or carry on without them? If the latter, then how long would it take the business to recover?
Finally, consider the premiums you’ll need to pay and how much you can afford. As a general rule, though, insure the key person for a slightly higher amount than you think they’re worth to the business, rather than the other way around.
As a general rule, though, insure the key person for a slightly higher amount than you think they’re worth to the business, rather than the other way around.
It’s also important to remember that this is not the same as a personal life insurance policy and is not designed to benefit the person’s family or personal dependents.
Key person insurance is something that every company should think about. Even though all businesses are a collective effort, there are often individuals whose ability, personality or knowledge frequently carries the day. These people aren’t always out front soaking up the glory. Sometimes their importance is largely unacknowledged. However, as they plug away behind the scenes, they are maintaining the core of the business.
Alan Boswell & Company offers a full range of business protection policies, including key employee cover. We can ensure you get the right kind of policy at the right level. We also offer shareholder protection insurance among other options.
When the company is reeling from the loss of a director, owner, leading front-of-house employee or head of accounts, key person insurance is essential for keeping the company afloat in difficult times. Give us a call to find out how we can help your business to survive the loss of an irreplaceable member of the team.