What is Key Person Insurance?

In the world of business, certain individuals play crucial roles that significantly impact the company’s success. These key individuals, whether they are top executives, talented managers or key salespeople, are often indispensable to the smooth operation and profitability of the business.

Understanding Key Person Insurance

Key person insurance is a type of business insurance designed to protect companies against the financial loss that might occur if a critical individual within your organisation were to pass away or become seriously ill. Unlike personal life insurance, which is intended to protect individuals and their families, key person protection is specifically for businesses and is in most cases tax-deductible, making monthly premiums 43% cheaper.

A ‘key person’ is someone whose skills, knowledge, experience or leadership are critical to the business’s success. For example, this could include:

• A CEO whose strategic vision drives the company forward
• A top salesperson whose client relationships generate significant revenue
• A technical expert whose specialist knowledge is essential to product development
• A key manager whose leadership ensures the smooth operation of day-to-day activities.

By insuring these key individuals, businesses can safeguard against the financial instability that might arise from their loss, allowing them to cover expenses such as hiring and training a replacement, compensating for lost revenue or repaying business loans.

Key Person Statistics 2024

Research indicates that 40% of businesses have no continuity plan, and only 18% have insurance to cover key people. Many businesses underestimate the financial strain that could arise from the death or critical illness of a key member.

Legal and General asked business owners their thoughts on what would happen to their company if they were to lose a core member of the team:

• 46% said it would affect cash flow.
• 40% said it would affect the company’s reputation.
• 63% expect it to impact their staff
• 44% felt it would affect creditor attitudes.
• 52% did not think the business would survive the next 12 months without a key person.

How does Key Person insurance work?

Key person life insurance & critical illness cover is slightly different to personal protection. Here’s how:

The underwriting process involves gathering detailed information about both the key individual and the business. Insurers will typically assess:

1. The key person’s role within the company and their contribution to its success.
2. The company’s financial status and the potential impact of losing the key person.
3. The key person’s health and medical history, like a traditional life insurance policy.

Once the policy is live the business will:

1. Put the policy into trust – The Insurance Surgery will help to set this up.
2. Pay the premiums for the key person policy – these are typically tax-deductible as a business expense.
3. Own the policy and hold the status of being the sole beneficiary, meaning that any payout from a claim goes directly to the company.

The amount of cover is determined based on the key person’s value to the company. This can include factors such as the cost of replacing the individual and the financial impact of their loss on the business.

Does your business need key person insurance?

To understand if this type of business insurance is right for your company, ask yourself the following questions:

• Does the business have any key individuals who contribute heavily to profits and whose absence would affect this?
• If so, who would these be and how many key people do you have in your business?

Taking the time to answer these questions can help in formulating strategies to mitigate risks and ensure the continued success of the business even in the face of unexpected changes.

Did you know:

1. Almost all businesses (99%*) had at least one key person in their business.
2. Almost 4 in 10 businesses (38%) said they had 3 or more key people*.

Benefits and Uses.

 If the key person were to pass away or become critically ill, the insurance policy would provide a lump sum payment to the business. This financial support can be used to:

• Cover the costs of recruiting and training a replacement
• Offset the loss of profits or manage operational disruptions
• Repay any debts or loans that the key person guaranteed
• Provide financial stability during a period of transition and uncertainty

As your business owns the policy, you would maintain control over how the insurance benefits are utilised.

Key person insurance is a vital tool for businesses to protect themselves against potential financial hardships. To learn more about key person insurance and explore your options, speak to The Insurance Surgery.

Data sources: Legal and General, Business protection, state of the nation SME’s report