In every office, shop or factory in the country there is a notice proclaiming that the employer has taken out insurance to cover accidents to employees at work.
Every car or lorry owned by a business has to have at least the minimum level of insurance required by law. Most prudent business people will have arranged for insurance on the factory, office buildings, even on the desk at which they work.
But one valuable business asset is often left uninsured.
Far too few businesses have any insurance to cover the one eventuality that can literally mean the end of the business and the income it provides – the death or illness (including critical illness) of a key person.
Whether the business in question is a partnership, a Limited Liability Partnership, a company, or even a sole trader, it is likely to have an individual, or individuals, crucial to its continued activities and prosperity.
And during times like the ones we’re currently experiencing, where the majority of businesses are encountering previously unimaginable trading circumstances, these individuals become even more important. If Covid-19 were to strike, what would happen to them?
We’ve been receiving a lot of queries recently regarding Key Person Protection and thought it would be a good time to explain how it works, and why you may need it for your business.
Who is a Key Person?
A key person is an individual whose skill, knowledge, experience or leadership contributes to the financial success of a business. A key person could be one of a number of people within the business, such as the:
Anyone whose death could lead to financial loss for the business through:
Loss of profits
Having to recruit or train a replacement
Important business contracts being lost if the key person is not there to maintain relationships
Customers and suppliers losing confidence in the business
Most small and medium sized businesses will have one or more employees who are crucial to their continued success.
What type of policies are available?
You can choose either a life cover policy or a life and critical illness cover policy.
Your decision depends on what circumstances are involved and the events the business want to insure the key person against.
The effect of being diagnosed with a critical illness can have the same devastating effects on the business as the death of a key
Who pays the premiums?
As the business is the owner of the policy, it would pay the premiums.
Barry & Adele are the founders and majority shareholders of a small but successful IT software solutions company, both are married (not to each other) with young families. While they both fully understand the business of their company, Barry and Adele’s background is in IT consulting. The real heart of their business is about helping other companies have the right IT solutions for their business.
To be successful, they rely on those solutions being ‘fit for purpose’ and every client is different. Both Adele and Barry realise that as well as each other, Marcus, who is the Technical Director, is also a key contributor to the business’ success and wellbeing. Barry and Adele have key person cover on their lives covering death and critical illness. However, the growing importance of Marcus to their business has made them realise the prospects for their company would be seriously harmed if, for any reason, Marcus was no longer around. As directors, Barry and Adele ensure that Marcus’s benefits package is sufficient to retain his services – this is within their control. Marcus dying or suffering a serious illness, however, is not within their control and that’s why they need insurance.
There will be a need to replace Marcus;
Likely to have to pay recruitment and training costs to replace Marcus;
There is likely to be additional costs of disruption through the need to be involved in the recruitment process;
Who does Marcus’s work while any replacement is getting up to speed? Will they cope, and be capable?
By how much will profits be depressed, and for how long?
A suitable protection policy, or policies, will provide cash and would mitigate any financial loss caused by Marcus’s temporary absence, or tide the business over until a replacement is recruited and trained.
This is just one example, but there are many scenarios in which Key Person Insurance could be of use for your business, so you should always seek individual advice.
If you’re interested in Key Person Protection or have any queries around the issues covered here, please get in touch with your usual Punter Southall Aspire contact to discuss.
We’re here to help, and we’d be happy to talk to you.
If you're also considering other forms of protection, read our guide covering the options available to individuals:Click to read Protection Matters