What is key person insurance and how does it work?

Protect the Future of Your Business with Keyperson Insurance

For a lot of small business owners, the idea of key person insurance (or “key-man” insurance as Sexist Sid would put it) is either something they’ve heard about or read about in passing. And while it sounds like a nifty way to cover your back if you lose a key employee, you might wonder what on earth it actually is and how you can get it.

So I’ve put together this guide to give you the basics on key person insurance.

Did you know that 3 out of 4 businesses close within 5 years of the death of the founder?

What is key person insurance?

Keyperson insurance is is a type of life insurance that protects the business from financial loss when its key employees die.

When a business buys key person insurance, the business will get the payment of a death benefit if the insured person dies.

Why insure your key people?

There is a very real possibility that your business will suffer the loss of a key person. 1 in 5 claimants are under 39. 

The loss of a key person can have a major financial and operational impact on your business. Some of the ways in which your business may be affected are listed below.

• The business will have to survive without that person’s unique skills, business contacts or intimate knowledge of your business. This may result in a loss of confidence by both customers and suppliers.
• Bank loans could be called in if the key person had given a personal guarantee
• There could be a withdrawal or reduction of credit facilities by banks or suppliers who are concerned about the future of your company due to the death or serious illness of that person.
• Loans made will have to be repaid.
• Not forgetting the additional cost of recruiting a suitable replacement.

What can you do?

Putting Keyperson Insurance in place can help your business overcome the financial repercussions of losing a valued member of staff.

The policy will pay out a lump sum benefit to the business on the death or serious illness of an insured key person. This lump sum benefit will compensate the business for any loss of profit or can be used to repay loans or recruit a suitable replacement.

How to set up Keyperson Insurance?

Having determined who your key people are, the next question is how much you should cover them for? A general rule of thumb is to cover the key person for 5 to 10 times their current annual salary. However, you should also take into account the following:

• Any loans personally guaranteed by the key person and/or any loans the key person has made to the business.
• The estimated loss of profits that the business would suffer due to the death or serious illness of the key person, including the cost of recruiting a suitable replacement