You would probably find it unthinkable not to have insurance protecting your business contents from the effects of a fire or a burglary.
However, the effect of losing one of your key employees within the business could be much more difficult to recover from.
Proper cover is vital to help your business recover quickly and minimise the effect on your profits should an unfortunate event happen.
Key person insurance can compensate a business for loss of profits on the death, critical illness, or disability as a result of sickness or accident of an employee.
The financial impact may include: -
- Loss of new business secured by the key person
- Loss of access to loan finance dependent on the key person
- Necessity to suspend or stop production of certain products on the loss of the key person
- The cost of recruiting and / or training a replacement
The key person(s) are likely to be directors, senior managers, sales staff, research & development specialists, etc.
Key person insurance is designed to protect your business against loss of profits. It is the business that will suffer loss and should be insured against it.
As with any insurance it is important that the proceeds are in the right hands at the right time.
Key Person Protection benefits
- A lump sum payment can benefit your business in the event of the death or critical illness during the term of a key person
- Financial support that could help with the cost of recruiting a replacement or reorganising your business
- Cover a profit shortfall if sales are affected by the unexpected loss of a key person
If you are a company, the usual way to set up cover is to have the company take out the policy (as plan owner) on the life of the key person. It is possible to arrange life insurance, income protection and critical illness policies in this way.
If you are a partnership, it means that it is not possible for the partnership to own the policy, unless it is a limited liability partnership (LLP).
A solution to this is to have one or more partners take out an insurance policy and hold it on trust for all the partners in the firm. If the key person is a partner they can take out the policy on their own life and place it in trust for the other partners.