Key Person Insurance — What are the benefits to your business?

Key Person Insurance is a level of cover that protects your company financially if a business-critical team member were to become terminally ill or die.

Benefits 101

⋅ min read

A company’s people are, of course, essential to its success. This is why Key Person Insurance was invented. It’s a level of cover that protects your company financially if a business-critical team member were to become terminally ill or die. With 20% of businesses admitting they didn’t even know Key Person Insurance was an option, we’re outlining the benefits so you can make an informed decision as to whether or not you need it.

What is Key Person Insurance?

Key Person Insurance is designed to help keep your business trading if an important team member dies, as policy proceeds are paid directly to the business to help safeguard against any loss of profit. Essentially, it gives stakeholders the confidence and peace of mind that your company can survive in the event of a key person not being able to work.

Research by Legal & General found that 59% of businesses believe they would have to stop trading in less than a year after the death or critical illness of an important individual, which shows just how valuable this type of insurance can be.

What constitutes a key person?

It could be anyone who is crucial to the day-to-day running of your company. It might be a director, founder or regular employee whose skills, knowledge and experience have a big impact on the business revenue. For example, maybe your business is made up of five employees, one of which is a Web Developer and no one else is capable of doing their job. 

To decide who your key person (or people) are, ask yourself a few questions:

  • Do any loans or financial commitments depend on that person? 
  • Would their loss have a significant impact on sales? 
  • Would their absence affect future planning?

Why is it great for businesses?

No one likes to think about worst case scenarios, but taking out insurance is the best way to give you peace of mind if something were to happen. It’s why many people take out life or health insurance at some point in their lives, to provide valuable support to them and their families if life doesn’t go to plan.

If a key team member were to die or fall terminally ill, this could have a major financial impact on the business. It’s particularly crucial for small businesses, where each individual has a much more tangible impact on the daily running and success of the business.

Taking out Key Person Insurance is a great way to protect your business and keep it afloat during tough times. The way it works is your business receives a lump sum payout if the insured key person dies during the length of the policy. This can help to compensate for the loss of their talent or experience or leadership, particularly if it’s hard to replace. Whether you put it towards rehiring for the role or paying off outstanding loans, how you spend it is up to you.

Taking out Key Person Insurance could help your investors and suppliers rest easy, too. Even if you think your company can survive without a key individual, investors might be more wary, causing them to potentially pull the plug on their investment. Similarly, if a key member of the finance team died, suppliers might be worried about when their invoices will be paid.

One business who recognised the value in Key Person Insurance is Adworks, who provide advertising design and purchasing services in Scotland. A while ago, their company secretary realised that the business would suffer considerably if they were to lose their CEO, Daniel Knox. As a small, close-knit team with business relationships spanning decades, she decided to invest in Key Person Insurance for Daniel, and they now have a long-term policy in place to protect the business should anything happen to him.

Some things to consider before you take out a policy

Self-employed people aren’t always eligible

Some providers will only offer Key Person Insurance to limited companies. Partnerships are often eligible for this cover, but you’d need to get advice from an expert to work out an arrangement involving trusts. If you’re looking to take out Key Person Insurance as a sole trader, you might be offered a policy on a ‘life-of-another’ basis, where any claim is paid directly to the sole trader.

There might be tax implications

Unfortunately, the tax rules on Key Person Insurance are complicated. Your business might be able to claim a corporation tax deduction on premiums if it meets certain criteria. It might seem odd but payouts are typically (but not always) treated as business revenue, which is taxable. If the payout on the policy you’re interested in is taxable, it’s a good idea to work out the gross payout to make sure the net figure is enough for your business.

You can spread your cover across multiple key people

Remember that you don’t have to throw the whole cost at covering one high-up individual. The insurance you choose might depend on the size of your business. In fact, 38% of businesses in this report said they had 3 or more key people. If you have £1 million to spend on Key Person Insurance, for instance, it might be worth investing £25,000 in each of your top four performers to spread the risk.

Whether you decide to take out a Key Person Insurance policy is up to you. It depends on many factors, from the size of your business to pressure from investors and your appetite for risk. Ben makes offering Key Person Insurance easy, providing you with a benefits consultant who’ll find you a provider at the right price. As with any other type of insurance, it’s often better to be safe than sorry.

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