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If you own a business, then there’s a good chance you’ve taken steps to protect your assets against significant events such as fire or theft.
Though, it’s also vital to consider how your business would cope if a key employee suddenly became unavailable due to critical illness or death.
Just as protecting your premises and equipment is so important, covering your business against the loss of essential employees is just as crucial.
This is where key person insurance comes in.
Over the past two months, we’ve explored different forms of protection, including relevant life cover and shareholder protection, both of which could benefit your business.
This month, as we conclude the series, we’re focusing on key person insurance. So, continue reading to discover how it works, and why it might be a valuable addition to your business.
Key person insurance protects your business if a valued employee passes away
Key person insurance essentially shields your business from the financial implications of losing an important employee.
Much like other forms of protection that cover tangible assets, key person insurance is designed to protect your business against the loss of critical people. They can be your business’s most valuable assets, after all.
If a key employee covered by the insurance passes away or suffers a critical illness, the policy typically pays out a lump sum to your business.
Despite its practicality, key person insurance remains somewhat uncommon in the UK, as a fascinating report from Legal & General showed in 2021.
Indeed, while 99% of UK businesses have at least one key person – and 38% have three or more – only 18% have protection to cover them.
Moreover, 52% of businesses would cease trading entirely within a year if a key person were lost, showing just how important it is to consider insurance.
Key person insurance has some helpful benefits for your business
Key person insurance provides several practical benefits that could help your business through times of uncertainty – read on to discover three of these advantages.
- It offers stability to your business
The sudden loss of a key person could disrupt your business’s operations, reduce income, and potentially even increase costs.
Thankfully, key person insurance provides a lump sum that could help you maintain your finances during such a challenging period.
This not only supports your business financially but also offers peace of mind, knowing that you’re prepared for the unexpected.
Moreover, losing a key individual can create uncertainty among clients, employees, and investors. Having key person insurance demonstrates that you’ve planned for unforeseen events, helping to maintain confidence in the stability of your business and ensuring you can continue serving your customers or clients.
- It can help you find the right replacement
Replacing a key employee can be time-consuming and costly. Without financial support, you might feel pressured to make a hasty hiring decision that could harm your business in the long run.
The payout from key person insurance could allow you to take the time needed to find a suitable replacement, potentially minimising any disruptions to your business operations.
- It could protect your business from debt
If your business has debt and a key person dies or becomes critically ill, this might inadvertently affect your income, meaning you would struggle to repay your borrowing.
Moreover, lenders might even reconsider the terms, call in payments, or increase interest rates, potentially placing your business under additional financial strain.
With key person insurance, you could use the payout to repay debts, ensuring your business remains financially secure and reducing the risk of lenders losing confidence.
There are several considerations to keep in mind
While key person insurance does offer several benefits, there are a few considerations to keep in mind – here are three.
- You will have to pay premiums
It’s worth noting that key person insurance requires regular premium payments, and these can be expensive if the individual being insured is older or has pre-existing health conditions.
If you have a smaller business, these premiums might strain your budget, especially if the chances of having to claim seem low – although of course, you never know when you might need the cover.
As such, it’s essential to weigh the potential risks of losing a key individual against the cost of premiums to determine if it makes sense for your business.
- The cover is relatively rigid
While key person insurance does protect your business from the passing of an important person or them falling critically ill, it might not shield it from other, more common, scenarios.
This could include the person voluntarily leaving or retiring. So, to address these risks, you might need to explore additional strategies, such as succession planning.
- You might become more dependent on a single person
Having key person insurance in place might inadvertently lead to overreliance on one individual, potentially creating vulnerabilities within the business.
While it’s practical to value a key employee, it’s equally vital to focus on diversifying skills among other team members and building a strong leadership team.
This ensures that your business remains resilient, even if you lose a key person.
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Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
All information is correct at the time of writing and is subject to change in the future.
Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
Note that financial protection plans typically have no cash in value at any time and cover will cease at the end of the term. If premiums stop, then cover will lapse.
Cover is subject to terms and conditions and may have exclusions. Definitions of illnesses vary from product provider and will be explained within the policy documentation.
