What Is Key Person Insurance?
Key person insurance could be the difference between the life and death of your business: it really is that important. Here, our financial planners explain just what key person insurance is, how it can benefit your company and which businesses are most in need of it.
Key person insurance is a type of life insurance. It is a policy taken out to protect against the death and/or critical illness of a business’s key personnel. These are usually only the people who are fundamental to the operation and profitability of the business: owners, chief executives and managing directors. However, any individual that has a major impact on the business’s ability to function can be insured. For example, high fee earners or specialist scientists.
The company pays the premiums for the insurance. Then, upon the death or critical illness of any of those covered, the company will receive the pay-out to offset the financial burden of losing a key contributor to the profit/operation of the business.
Key person insurance can be arranged to qualify as a business expense so that corporation tax relief is allowed on the premiums. Contact our advisors to discuss whether your company could arrange a tax-deductible key person insurance policy.
The benefits of key person insurance
The most important thing to understand about key person insurance is that it works best for those members of your company who are intrinsic to the operation and profitability of the entire business: the founder who knows all the processes but hasn’t written them down yet; the specialist whose knowledge the whole team relies on daily.
Because the business operation would take a serious hit without these people, they should be insured. The pay-out gives businesses a financial ‘tiding over period’ after the loss of the key staff, where they can either:
- Search for a suitable replacement and restructure the business, or
- Decide to close the businesses with less chance of bankruptcy, the pay-out being used to pay redundancies, tax and creditors.
Who should get key person insurance and which employees should be covered?
Because it’s more likely that small companies will rely heavily on small number of people, key person insurance is especially important for SMEs.
In SMEs it is less likely that the overarching business structures and operational frameworks that make the sudden loss of key person more bearable will have been put in place. Whereas, in a large company, there may be several people who can step in and cover the load until a replacement is found, a small company might only have one member in a senior role. In these instances, protecting the rest of the company from their loss is crucial to securing your business’s future.
On the other hand, those performing well against KPIs should not be confused with key persons. Even if, for example, a certain salesperson is bringing in a large portion of your business, it might not be worth insuring against their loss if an equally good salesperson is easy to find, as their loss will not jeopardise the entire business.
This article is for information only and must not be considered as financial advice. We always recommend that you seek independent financial advice before making any financial decisions.