From company size to cost, find out what you need to think about before choosing a keyman insurance policy
In some businesses a significant amount of revenue can be dependent on just a few people, from the owners of a small family business to senior executives at a large corporation.
But what happens if one of those key people becomes too ill to continue in the business or, in the worst case, what if they died?
Apart from the obvious personal tragedy, it could have severe and potentially irreparably damaging consequences for your business.
In the short-term it could mean a considerable loss of revenue.
In the long-term, it could result in lost business that you would have been bringing in because of the key person.
So what can you do to protect your business in this scenario and ensure you can continue to pay wages?
One option is to take out keyman insurance.
Choosing the right level of keyman insurance for you and your business is important.
Too little cover means you might not be covered for what you need in the event of a death or critical illness.
Too much and you’re paying over the odds and hurting the business financially for no reason.
From company size to cost, find out what you need to think about before choosing a keyman insurance policy.
The size of the business
The level of keyman insurance you take out depends on both the size of the business and the number of employees.
For example if you’re a small business with two owners and a number of employees, you might consider taking out keyman insurance on both owners in case one of them becomes ill or dies.
This would provide financial security, covering the short-term income for the business while also potentially funding the recruitment or training of a new owner.
On the other hand, if you’re a sole trader with little to no employees, you’ll need less cover.
You might just need to cover any outstanding debts owed by the business so they don’t get passed over to the person’s estate.
How much revenue or income the key person generates
The more money the key person generates for the business, the higher the level of keyman insurance cover you’ll need for them.
The more they contribute to the business and the more it’ll take to find a replacement, the higher level of cover you’ll need.
If the key person is a high performing executive generating large amounts of money for the business each year, what happens when they’re not there?
And what about the relationships they’ve built up with clients over the years?
Maybe some clients only stayed because they trusted that person to do the work in a standard they’re happy with.
Not only is the person no longer there, but you’re potentially missing out on new income but your client base won’t be as stable as it used to be.
Keyman insurance allows you to cover this drop in income until you’ve steadied the ship.
If the business has taken out loans to pay for equipment, workspace or to fund a growth period, then you’ll need more cover.
This makes sure any outstanding payments are taken care of in the event of a death or critical illness.
Without keyman insurance, these payments can be left to business partners or family members, which could affect them financially as well as the business.
How much will it cost to replace a key person?
Although it’s not easy to think about, if a key person dies or becomes too ill to continue in the business, they’ll need to be replaced so the business can continue to operate.
This doesn’t just include funding their wages.
It could also include covering any recruitment costs.
If you need a high level executive or an expert in a certain field, you’ll probably need a headhunter to find them.
Other additional costs include any training, whether that’s in house or online course subscriptions.
All of these things add up and can cost a lot.
You need to make sure your level of insurance covers this to make sure the new employee is up to date and at an appropriate level to take over the responsibilities.
Will the business continue after a death or critical illness?
Whether the business will continue after the death or illness of a key worker is a question that will inevitably come up depending on the size of the business.
And it could also impact the level of cover you need.
If you’re a sole trader and the business will fold if you’re unable to work in it, maybe you’ll only need enough cover to pay off any outstanding debts and to cover the costs of closing the business.
If you’re going to pass the business over, your keyman insurance may need to cover any legal fees or other costs associated with transferring the business to another person.
For a larger business, it’s not likely that the death of a key person will result in the closure of the business, instead your keyman insurance will be needed to cover any lost revenue, salary and recruitment costs in the short-term.
You could also use it to cover the payment of any outstanding debts in the business - just keep in mind that will increase the costs of the insurance premiums as well.
What level of cover can you afford?
It might be the case that you can’t afford the level of cover you want, or that you can’t cover every key person in the business.
In this case you’ll need to prioritise your cover.
Look carefully at the business’ finances and see which people contribute the most revenue or clients.
Whoever comes out on top here are the people you’ll need to cover first, as losing these people would cause the highest level of disruption.
The long-term goal is to be able to cover all of the key members of staff.
Find the right level of keyman insurance with Rigby Financial
At Rigby Financial we provide all clients with a dedicated expert to help them find the right level of business cover, at a price they can afford.
We’ll work with you to prioritise your keyman insurance so you’re getting the best protection in the worst case scenario to help safeguard your business’ future in the event of a worst case scenario.
For more information, get in touch today to see how we can help you.