Whether you own or manage a small, medium or large business, it can sometimes seem like the sheer number of insurance policies being offered to you is endless. There are a slew of optional insurance policies so we don’t blame you if you’re finding it hard to keep up. You may say “ours is just a small business” and discount the idea that Key Person might be needed but we urge you not to do that and check it out.
While it can be overwhelming when you realise just how many different types of insurance there are for you to consider, it’s important that you do your homework and investigate what each type of insurance can do for your business. A common question we get asked is “Do I need Key Person insurance ?” but the reality is when we get asked that the person asking doesn’t always understand exactly what Key Person cover is and how it might apply (or not) to their business. Quite often they may actually mean Business Succession or Partnership cover – either way it’s a very good question as a starting point to explore with an Adviser what the risks actually are and whether one of these types of insurance has a role to play in your risk management.
What exactly is key person insurance?
Key Person insurance is basically an insurance policy taken out by a business on the key people in that business and it might cover life, trauma, temporary or permanent disablement. In a small business, a “key person” could be the people who own the business (so, you and your partners, if you have them) and anyone else who works within the business who is also critical to its ability to function effectively — people with particular expertise or knowledge of the business —and who cannot be replaced so readily such as a Director or a Sales or Operations Manager.
In the event that person dies or is incapacitated, the policy will provide the company with a lump sum to help the business bridge the period till they return to work or are replaced. A useful question is to ask ‘What would happen to our sales income or to our expenses if Joe or Mary died or were sick for 3-6 months or more ?’
Key Person insurance enables you to keep the business running & financially stable while you figure out what your next steps are if something like that hits. Helping you scope the ‘Who, What & Why’ of Key Person cover is best done with an Adviser experienced in the business market.
How do I know if key person insurance is relevant to my business?
Key Person insurance is of particular value in a businesses where there are two or more partners or where someone else is essentially running your business. If you are the sole owner of your business and there are no other people who own a stake in the company and no employees or other people who depend on the business as a form of income, then Key Person insurance may not be relevant and good personal risk planning is the solution taking the business situation into account.
What are the benefits of key person insurance?
The ways that insurance money in this kind of situation can prevent your business from suffering unduly might not be immediately obvious but here are some ways it might help.
- Recruitment and training of new staff as a replacement for the key person
- Temporary hire of staff until a permanent replacement can be found
- Payment of business expenses and loans to free up cash flow for some of the above costs
- Offsetting a downturn in sales turnover and revenue for a period
- Lost income — for example, from having to cancel projects or put them on hold
If you do wish to close the business, the payout from a key person insurance policy can help you pay off debts and provide employees with redundancy packages. Basically, a key person insurance policy could be critical to you avoiding bankruptcy or having no choice but to leave the business and your employees with nothing.
So, what’s the verdict?
As always, we’re not in the business of telling you what you should and shouldn’t do — you know your business better than anyone else and, therefore, you are the person to make these sorts of decisions. However, when it comes to Key Person risk we would encourage you to give it some consideration.
In doing this here are some questions you might ask yourself:
- What kind of loans does my business have and how will the repayment be impacted by the loss of a key person?
- How long would it take and how much would it cost to find a replacement for a key person in my business?
- Is there anyone else besides you who is dependent on the income your business provides?
- What kind of a drop in gross profits – or worse net profit - will likely follow the loss of a key person in my business?
- What kind of projects are currently on the go in our business and who is key to them being delivered?
- Will the loss of a key person also result in the loss of key customers?
In order to make a decision that is right for you and your business we'd recommend talking to one of our Advisers about the types of covers available and how it can be set up and tailored to your needs. If you're considering this cover or just want to talk it through get in touch with us today.