Key Person Insurance Cover

As a business owner I recognise that there are a select number of employees that are crucial to the continuing success of my business. I have heard of Key Person insurance that will compensate my business in the event of death or illness to such key employees. Can you please explain this to me.

You are correct in that within every business there are a few key people on whom much of the success of the business rests. A ‘key person’ is any key employee, director or consultant on whom the success of the business depends. In the event of Death or Illness to this person, the business will suffer financially.

For example, research has shown that 72% of SME Businesses ceased trading within 5 years after the death of the founder of the business*.

The loss of a key employee / director or consultant can affect your business in many ways:

• Loss of business contacts, management experience or intimate industry knowledge
• Loss of good relationships built up with suppliers, banks or distributors
• Bank loans may be called in if the ‘key person’ had given personal guarantees on these loans
• Withdrawal or reduction of credit facilities by your bank as they become concerned about the future viability of your business
• The additional cost of recruiting a suitably qualified and experienced replacement

 So, what is the solution?

A ‘Key Person’ Life or Specified Illness policy can be arranged with any Life Assurer in the market. Such a policy is designed to pay your business a lump sum on death or specified illness of the ‘key person’. The business pays the cost of the premiums. In the unfortunate event of a lump sum payout being made to the business arising from death or specified illness of the key employee, this lump sum can then be used to address some of the issues raised above.

A number of factors may be considered in determining the value of the life or specified illness key person cover to put be in place. Such considerations may be:

• Value of loans personally guaranteed by the key person
• Value of loans the key person has made to the business that may need to be  repaid to his / her estate
• Estimated  loss of profits the business would suffer due to the absence of the key  person

Key Person Insurance is designed to protect the business from the financial impact of a key employee / directors absence and should be considered as a prudent strategy to protect the business.

 *BDO Simpson Xavier