Key Person Insurance – Does Your Business Need It?
Does your business need Key Person Insurance?
With the Covid-19 pandemic affecting all aspects of life over the last few months, we’re sure your business has had to make many adjustments. And, more than likely, your contingency and disaster recovery plans have been put to the test.
But have you thought about what you would do if you were to lose a key person (such as a partner or key player) within the business? How would this affect you financially and would you cope?
Who is a key person?
A key person is somebody who’s knowledge or skills if lost, would impact the finances of the business.
If you’re a larger business, you may have several key people, each with unique skills, knowledge and responsibilities that combine to ensure that things run smoothly day-to-day.
If you’re a smaller company, the key person might be the owner or partner or you! And, when that person is out of action, it affects profit, revenue and even the ability to gain new customers.
Have you considered the risks?
The four most common ways in which a business is affected by the loss of a key person are:
1. revenue losses (due to their inability to work)
2. client and supplier confidence
3. the cost of hiring a new employee (as a replacement)
4. covering any debts
According to Legal & General in their State of the Nation’s SMEs report (6th edition), ‘Once businesses understood the consequences of losing someone important, over half (52%) did not think that the business would survive the next 12 months, others said that the business would probably survive, but they would struggle to find a replacement person. The rest said that there would be some financial uncertainty.’
It’s, therefore, crucial to protect the business, to give you the breathing space to make the right decision (be this a replacement or training up an existing employee), should you lose a key person.
What is Key Person Insurance?
With a Key Person insurance policy, the company will typically receive a lump sum payment if the key person dies or (if chosen) is diagnosed with a critical illness. The policy insures the life or life and health of the key person and the company is named the benefactor and receives the proceeds in the event of a claim, helping the business to continue to trade as normally as possible.
The cost of key person insurance varies depending on several factors, including the level of cover and the key person’s age, health and occupation.
As with other types of business protection policies, there are tax-deductible components that may qualify for corporate tax relief.
What’s at stake?
Key Person insurance will protect you against the loss of a key person and will help return the business to the state it was in before the loss of the key person.
It’s always best to seek professional advice when it comes to insurance. The team at Covertree can help you identify the key people and their financial impact, to ensure the company you’ve worked so hard for will thrive and survive into the future.