Do you run your own business? Then you are probably used to keeping multiple plates spinning at once! If you’re lucky, you will have a reliable bunch of people around you to help keep things on the move. But, have you considered that your success or failure can often hinge on this small team of people?
Would your business be able to survive if one of your vital team members suddenly dies or has a long-term absence? If the answer is no, then you should certainly consider investing in key person insurance.
We know it’s not the cheeriest subject, but it really does pay to be protected.
What is Key Person Insurance?
In simple terms, it’s life and critical illness cover taken out against your most valuable team members. It protects your business from the financial impact caused by a key person passing away or being unable to work.
In the unhappy event of the death of a Key Person, the policy pays out as a lump sum. This money can help to cover additional costs incurred or protect against losses and debt. Including:
- Profit losses
- Recruitment and training costs
- Sick pay or claims related to critical illness or loan repayments.
- Paying off business loans
For new and small businesses, this can be the difference between surviving or closing down.
Does Every Business Need Key Person Insurance?
Ideally, yes. Every business is going to be reliant on at least one person.
Staff members are your biggest asset so you want to make sure you can cope if you sadly lost any. It’s better to be safe than sorry and planning for unfortunate events is key to that.
In some cases, key person insurance is also a requirement for a business-related bank loan. The pay out from an insurance policy can cover the debt. So, chances are, you will find yourself in need of a policy at some point.
Who Counts As A Key Person?
As with many things, each policy has a slightly different definition of a ‘key person.’ They are generally someone who has a specialist skill set or significantly contributes to the financial success of the business, whether that is due to their skills, experience, knowledge or leadership.
Key people could be the CEO or Director, a top salesperson, a technical expert or someone with a financial stake in the business, to name a few.
Ask yourself these questions when considering who the key people are in your business:
- Are there any loans or overdrafts that depend on the key person?
- Would their absence affect business expansion plans or ongoing projects?
- Would the business be in danger of losing customer orders?
- Would it result in a loss of goodwill or hardening of suppliers’ credit terms?
- Would the business miss their administration or management contributions?
How Much Key Person Insurance Cover Do You Need?
The level of cover you take out will depend on a number of things. A good place to start is the yearly salary of those to be covered. Generally, a yearly salary should be multiplied by 5 times to get an accurate minimum level of insurance cover needed for that key person.
As an example, if your sales director earns £60,000 a year, you would be looking to buy a policy which covers £300,000 minimum in the event of their death or long-term illness.
You should also take into consideration the amount of profit they bring to your company and how much it would cost to recruit someone new. The bigger the shoes that need to be filled, the more cover you will need.
Ask Your Financial Adviser
It’s important to make sure you have the right cover in place should the worst happen. When dealing with your own business it can sometimes feel a little overwhelming. Losing a key person could have a huge impact on your business, so you want to make sure you get it right.
The best thing to do when seeking any business advice, is to speak to a professional. Your financial adviser will be able to help you with getting the right level of protection.
If you would like Face to Face Finance to help with your Key Person Insurance, don’t hesitate to get in touch.