Written by: Griffiths & Armour on: 12 May 2020
Why are businesses considering Key Person insurance?
As part of your business continuity planning and implementation during these challenging times, you may have considered what would happen to your business if one of your key employees were to become terminally or critically ill or, tragically, pass away.
When you lose someone key to your business under these circumstances you not only have to deal with the emotional impact that this will have on your staff, but also the potential financial implications of such a loss.
Time will be needed to stabilise your organisation and in the immediate period following, there is a real prospect of a loss of profits and, possibly even, confidence in the business. All at a time when the bank may be less willing to offer loans to see you through this period and the likelihood that any Directors’ loans and personal guarantees will become payable.
Key Person insurance can protect your business or organisation from the financial impact of losing a key member of staff or in some cases, help the company survive the blow of losing the person who had a fundamental role in making the business work.
Put simply, you can insure the life of a key person in the same way you would arrange insurance for yourself, but the company owns the policy, pays the premiums and would receive the payment from the insurer.
Who is a Key Person?
This can vary and will depend on the circumstances of your business. It could be your business owner, whose contacts and relationships are unique, or a technical expert whose skills would be difficult and expensive to replace. Essentially anyone whose death or illness would have a significant impact on the financial position of your business.
How does Key Person insurance work?
Key Person insurance can pay a regular income if the person is unable to work because of an illness or injury, or more commonly, a lump sum if they die or are diagnosed with a terminal or critical illness.
Your business can use the funds to help replace profits over the short term, pay off a loan (including directors’ loans) linked to the business, or pay recruitment costs and a possible golden hello for a replacement.
What level of cover would you need?
If your business needs to provide protection for a loan this is relatively straightforward, as the cover can reflect the loan amount. A policy can be arranged where the lump sum reduces in line with the payment and often the interest rate can be tracked to some degree too. If, however, you need to calculate how much the key person is worth to the business this can be more challenging but, with the right guidance and expert advice, can be achieved.
How much does Key Person insurance cost?
You decide how much financial protection the business needs with the final premium depending on the following:
How much cover you need
How long you want to insure this for
The type of benefits you want to insure
Age and health of the key person
Whether they smoke or vape (nicotine products)
Any hobbies or pastimes that are considered to have a risky element
Sometimes the insurer may need to ask for more information to reach a decision, such as a report from a GP or a recent Medical Examination or it could be financial information if you need a high level of cover.
What policy benefits should we cover?
The majority of Key Person policies will pay a lump sum to the company should the person die during the policy term, but the chance of them suffering from a critical illness is actually significantly higher. It is recommended that some element of Critical Illness benefit is included within the policy.
Insurers include a broad range of Critical Illness conditions within their policies and the lump sum would be paid if the key person suffers from an illness that is included. The vast majority of claims payable are due to three main conditions: cancer; heart attack; and stroke.
In the current climate, is it possible to place Key Person insurance cover?
The insurance market is still reacting to the unprecedented circumstances we find ourselves in but many are still open for business. The main issue will be obtaining medical information if this is required, as its unlikely GPs will be able to complete non-essential medical reports for their patients.
The market is responding to this, and some insurers have increased their limits for the level of cover before they need to ask for medical information. Some are piloting a virtual medical examination.
If you would like to find out more, please get in touch.
If you have any questions on this article or would like more information or advice relating to Key Person insurance, please get in touch with Troy Johnson who will be happy to help.