What is Key man Insurance?

Key man insurance, also known as Key Person Insurance is a life insurance policy taken out by a company on the life of an important employee. It is designed to compensate a business for the financial loss brought about by the death or critical illness of this employee.

In this article, we cover the following areas:

  1. Why should your business consider Keyman Insurance?
  2. Who can be covered and who benefits?
  3. How Much Cover Do You Need To Protect Your Business?
  4. The difference between Key Person Insurance and Relevant Life cover

1) Why should your business consider Keyman Insurance?

91% of SMEs have four owners or less, and 95.6% have less than 10 employees. This indicates that these businesses are the ones that could be at the greatest risk in the event of the death or critical illness of a key person.

People are an important, yet often overlooked business asset and many businesses (particularly SMEs) have at least one key person it replies on.

The death of a key person can have a devastating effect on a small business, as it can lead to the loss of customers, key contracts, and valuable knowledge. A Key Person Insurance Policy can help to protect a business from these losses by providing them with the financial resources they need to recover.

So what would happen to your business if you, a co-director, partner, manager or one of your key employees was diagnosed with a critical illness, or died?

46% of UK businesses would be forced to cease trading immediately if a key person dies or was unable to continue working through illness or injury and 52% of businesses say they would probably cease trading in under one year.

Problems faced often include:

– Loss of profits
– Loss of sales
– Recruitment and training costs
– Loss of confidence from suppliers, resulting in difficulties obtaining credit
– Loss of knowledge of processes / systems
– Difficulties repaying existing loans
– Loss of goodwill

By taking out Key Person Insurance, small businesses can protect themselves from the potentially devastating effects of the death of a key employee.

2) Who can be covered and who benefits?

The definition of who is ‘a key person’ will vary from business to business and may not always be the founder. They are usually defined as an individual who plays a vital role in the financial success of the business, in otherwords, someone the insurance underwriters consider to have an insurable interest.

It could be a top salesman, an operations manager, office manager, technical manager etc, basically someone you simply can’t do without.

Keyman Life Insurance is taken out by the business to cover critical or terminal illness and/or death of an individual(s). The annual or monthly premium is paid by the business and in the event of a claim, a cash lump sum, or regular monthly sum (as defined in the terms of the policy) is paid to the business.

In some cases, the proceeds may even be used to help finance the purchase of the key person’s shares in the business.

3) How Much Cover Do You Need To Protect Your Business?

Once you’ve established you have key staff in your business you need to cover, how much key person insurance should you arrange?

The amount of cover you need will depend on the size and structure of your business.

If you have investors or lenders, they may insist on you having, as a minimum, sufficient cover to repay their investment or any outstanding loans.

You can also calculate it based on the contribution each key individual makes towards your business profits. For example, twice their contributions to gross profits, or five times net profits.

The important thing is to make sure you have enough protection to help your business survive in the event of a major loss.

4) What is the difference between Key Person Insurance and Relevant Life cover

Key Person Insurance

  • Available to all types of businesses with employees.

  • The employer takes out a policy on an important employee(s)

  • Policy can include critical illness cover

  • The employer pays the premiums

  • Usually classed as a business expense.

  • The employer is the beneficiary of the policy in the event a claim is made.

Relevant Life Cover

  • Not available to Sole Traders, or Equity partners in a partnership, or a member of a Limited Liability Partnership.

  • An employer takes out a life policy on an important employee(s)

  • Critical Illness Cover is excluded (must be purchased separately)

  • The employer pays the premiums

  • The employer can treat the cost of the policy as a taxable expense and there is an income tax and national insurance benefit

  • The employee’s family or financial dependents are the beneficiary of the policy in the event of a claim.

More information about Relevant Life Cover can be found here: https://ttwealth.co.uk/relevant-life-insurance/

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In Summary

When it comes to arranging protection insurance for your business there are many areas to explore, so I highly recommend you seek expert advice. If you would like to book a free 30 minute initial chat, please click the button below, or contact Tony Thomas on 07585 592494 or tony@ttwealth.co.uk