Key Person Insurance

Whatever the size of your business, you will have at least one key person - such as yourself or a member of your staff - whose unexpected permanent or long-term absence could result in devastating financial losses or even closure of your business.

Key person insurance can protect your firm from going under by paying out a large lump sum to your business, should a key member of staff suddenly die or become terminally or critically ill, to avoid leaving your business financially vulnerable.

• What is ‘key person insurance’?
• What is a key person?
• Who is a key person?
• What is key man insurance?
• Who within a company will need key person cover?
• What does key person protection help protect?
• How does key person protection work?

What is ‘key person insurance’?

Key-person insurance (also known as ‘keyman insurance’) is a type of business life insurance that safeguards and protects a business against the anticipated disruption and financial loss caused by a key person being absent from their role, indefinitely.

This type of insurance effectively insures a key person’s life but it’s your business who is the beneficiary meaning that if that person dies unexpectedly or becomes terminally or critically ill (an optional extra), the insurer will pay out a cash lump sum to your company.

Additionally, having this type of business life insurance in place can help:

• reassure stakeholders about your business’s future
• attract new investors
• raise capital for your business

What is a key person?

In a nutshell, a key person is anyone within your business who has a pivotal role and would be very difficult and expensive to replace, and whose absence would negatively impact a business’s profits, performance and stability.

A key person could be someone who is:

• responsible for a loan or overdraft
• integral to business expansion or proposed future projects
• a significant, primary contact for important customers
• heavily involved in company management or administration

Who is a key person?

A key-person will typically have a skill set that includes vast experience, expertise, superior knowledge and/or leadership skills.

A key person can be any person within a company who meets some or all of the above criteria who could be the owner of the business, a director or partner, or who is employed in any type of key role such as:

• a chairman
• a chief technical officer
• a partner
• a director
• a company secretary
• a department head
• a marketing manager
• a sales manager
• a senior technician
• an IT specialist

A job role or title isn’t always significant when deciding who to insure; it’s predominantly a person’s importance to the smooth functioning of a business and the cataclysmic effect their absence could have on its profits.

What is key man insurance?

Key man insurance means exactly the same as key person insurance and is just antiquated terminology that is still commonly used for this type of insurance.

Keyman risk insurance is just like ‘key person’ insurance, insofar as it covers financial losses sustained due to the absence of an organisation’s key woman or key man as a result of their untimely death or through being diagnosed with a terminal or critical illness (if chosen).

To clarify, key man life insurance is suitable for any person of any gender type who is important to an organisation; it’s not niche insurance specifically geared towards men. However, the more modern and politically correct terminology is of course ‘key-person’ insurance.

Who within a company will need key person cover?

It is entirely up to you to determine and decide who, within your company, is the backbone of your business and whose permanent or long-term absence could lead to devastating financial loss or even insolvency.

Key worker insurance isn’t always necessary simply because someone has an important job title; it primarily depends on how important and integral a person is to the successful running of a business, its stability but principally, its income and ability to pay back loans.

It is sometimes necessary and prudent to insure more than one key person, especially in medium to large enterprises.

What does key person protection help protect?

Key person insurance helps protect your business from financial loss and closure as a direct result of a key person dying or being terminally or critically ill and can help protect a business from:

• Loss of profits
• Recruitment and training costs
• Loss of contracts managed by the key person
• Loss of goodwill by potential investors
• Loss of confidence by customers and suppliers
• Payment of outstanding loans
• Marketing costs to regain customer and supplier confidence
• Costs of winding company down if no other alternative

How does key person protection work?

Here’s how keyman insurance UK works, including:

• What you need to do before you apply
• The types of cover you can choose from
• How to calculate the sum assured
• How to compare quotes and apply

Before you apply

Before taking out key-person life insurance, you will need to think about:

• What type of cover do you want: life insurance or life with critical illness cover?
• The length of time the cover should be for: how many years?
• The risks to be insured against: profit loss, recruitment costs, debts?
• The amount of cover: see suggested formulas below
• Affordability: how much can your business afford to spend on premiums?
• Taxation: consult your accountant on the tax implications of a key person leaving or retiring before the end of the policy term and possible tax relief on premiums.

Chose the type of cover

A business can choose to insure against a key member of staff:

• dying unexpectedly
• being diagnosed with a terminal illness (with a life expectancy of 12 months or less)
• becoming critically ill (this is additional cover and an optional extra you can pay for)

Calculate the amount of cover

To calculate the amount of cover, you will need to fully and carefully consider the profound effect the loss of a key individual could have on your business operations and how much this will directly impact your company’s profits. You should also research the cost of recruiting a replacement.

There are a few different formulas you can use to calculate the amount of cover required - we suggest using an average of the previous two years’ profit amounts (where profits are included in the calculation formulas below):

Salary formula

Choose an amount that is a multiple of the key person’s salary (typically up to 10 x the key’s person’s income for death - fewer multiples of salary are required for critical illness cover, if applicable).

Profits formula

Calculate the amount based on the key person’s direct contributions to profits and then multiply that amount:

• Up to x 2 for gross profit generated by the key person
• Up to x 5 for net profit generated by the key person

OR:

• Calculate: the key person’s income x gross profit x expected recovery period, up to five years.

Loan repayment formula

If you simply want cover for an outstanding loan, the sum assured should be the amount required to pay back the loan upon the key person’s death.

Compare key person insurance quotes and apply

Here, at Complete Business, we provide a professional, tailored insurance broker service to help you and your business source the right key person policy at the right price.

Simply fill in and submit our online form providing us with the necessary details about your business and your key person insurance needs, and we will provide you with the most competitive quotes from the best insurers, with no obligation to proceed with a purchase.

Once you’ve received our reputable, tailored and competitive quotes and have chosen your insurance policy, as part of the application process, the chosen key person will need to provide personal and medical information, and sign the application as the ‘life assured’.

Your company is responsible for paying the insurance premiums and so will be the sole beneficiary, should a claim be made.