Would your business survive if a key member of staff suddenly passed away or became too ill to work?
It’s probably not something you want to think about. And although the personal tragedy would be first to mind, you have a responsibility to consider how this would then impact your business – and your remaining employees.
A sudden death or long-term absence can have a huge impact on a company’s future success, making it essential to prepare for the worst-case scenario. Yet despite this, research shows that a huge 40% of businesses have no continuity plan in place.
The best protection? To invest in a key man insurance policy (often called key person insurance cover). Not only can this help to cover your business financially in the event of a key member of staff dying or becoming too ill to carry on in the company, but it can also ensure future success.
Keen to learn more about key person cover and how it could help to protect your business? Read on for a guide to everything you need to know, or talk in more detail to the experts at Rigby Financial and enquire about keyman insurance today.
What is keyman insurance?
Keyman insurance is a policy taken out by a business to insure its most valuable employees. It helps to think of it as business life insurance – life and critical illness cover for those who are crucial to your company’s success, whether that’s the CEO, your top sales guy, or someone with a specialist skill set.
If any of these key people were to suddenly die or contract a critical illness, a keyman insurance policy will protect your business against the financial repercussions. A lump sum is paid out directly to the business, and this can be used to cover the cost of any profit losses, replacement staff, or loan repayments. It will keep you afloat during a difficult time and could be the difference between your survival and closure.
What does keyman insurance cover?
Primarily, a key person insurance policy provides cover for death. If additional cover is selected at the outset, then it could also pay out for a critical illness or disability, which prevents your employee from working. In some cases, with the addition of an ‘income protection’ clause, it may even cover the cost of temporary staff who are needed due to long-term sickness absence.
Do I need keyman insurance?
The answer to this question is simple. If you own a business, then yes, ideally, you should have keyman insurance. Your staff are your greatest asset, and you need to be sure that – if the worst happened and an important person was no longer around – your company could cope with the change.
It’s particularly important to invest in keyman cover if you’re a relatively small or new company. This is when you’re most reliant on your staff, and losing a key member could be the difference between failure and success.
You may also be asked to take out keyman insurance when applying for a business-related bank loan, as the payout can be used to cover the debt.
What are the main benefits of key person cover?
With less emphasis on a ‘job for life’ and an increased risk of employees moving on elsewhere, people can be left questioning whether keyman insurance is worth the outlay.
But we’ll make this simple – it is!
And it’s advised that you take out keyman insurance, whatever the size of your business.
Although we’ve already discussed the need for taking out a policy, it can help to have the benefits clearly laid out. So here we outline in more detail why having keyman insurance is so important for you and your business…
1. Cover the loss of a key person
A key person is anyone whose absence would seriously disrupt the progression of the business.
This includes anyone from the founder to those with a specialist skill set in their department.
Without keyman insurance, your business could experience a range of financial problems.
Whether it’s the loss of revenue that the person would have generated.
Or potentially the loss of relationships with future customers that person would have built.
Although it isn’t the easiest thing to think about, keyman insurance protects you from this turmoil in the event of a death or an illness so critical that the key person can no longer work.
2. It can protect your finances in the short term
If losing a key person means lost profits, key person protection will help cover those costs until you’ve recovered.
It can also be used to pay for wages, replacement staff and even loan repayments owed by the business.
This will help keep your business afloat during a difficult period.
An example of this would be covering recruitment costs and paying off outstanding debt.
This limits your number of outgoings to save as much money as possible when the future of the business is unclear.
If you don’t have a keyman insurance policy in place, you could have scheduled payments but a lower overall income, causing financial issues.
3. Use keyman insurance to cover any outstanding debts
With keyman insurance, any overdrafts and loan repayments are covered.
It guarantees the repayment of loans (depending on the cover you choose) in the event of the death of an insured person.
Having this in place will limit the wider impact on the business to prevent closure.
Any loans taken out to pay for machinery, for example, can be paid off using keyman insurance.
This makes sure the business can carry on without additional outgoings.
4. Protect the future of the business
Going through something as difficult as the loss of a key employee could have a huge effect on your staff, particularly due to the uncertainty about the future.
The result of this is different for every business, so you’ll want to do what you can to make sure the future of the business is protected.
With keyman insurance taking care of the money side of things, employees can at least be more reassured that the business’ financial future is secure, and their own jobs aren’t immediately at risk.
5. Cover recruitment costs
You might not want to think about replacing someone under such circumstances, especially not immediately after, but the reality is you must continue doing business.
This involves finding someone new to be a part of that.
Keyman insurance will cover the cost of a new employee, as well as the process of advertising and interviewing candidates.
Consequences of not having key man insurance
Failing to have proper protection in place can have far-reaching consequences, including:
- Loss of profits
- Incurring costs for recruitment and training to replace the member of staff
- Liability for repaying outstanding loans
- Loss of customer confidence
- Harder to raise finance for growth
- Loss of expert knowledge and skills
If you’re still questioning the impact of not taking out keyman insurance, take a look at our case study. Highlighting Alan Jones, Managing Director of a private limited company, the study details the uncertain future – and potentially devastating consequences – his business faced by failing to put keyman insurance in place.
Who can be covered by a keyman insurance policy?
The definition of a ‘keyman’ is entirely dependent on your business and the employees you deem to fit into this criteria.
Typically, it’s reserved for owners or senior directors who contribute significantly to your business’ finances.
It’s also often used as a cover for top salespeople.
But it can cover employees with specialist skills, knowledge base, or responsibilities in the business who could be difficult to replace. For example, skilled engineers operating in a specific niche.
You can often determine who is a key person by asking:
- Are there any loans or overdrafts that depend on the key person?
- Would their absence affect business expansion plans or ongoing projects?
- Would the business be in danger of losing customer orders?
- Would it result in a loss of goodwill or hardening of suppliers’ credit terms?
- Would the business miss their administration or management contribution?
If you’re not clear on who should be identified as a key person in your business, why not chat things through with our knowledgeable team?
Call now on 01744 886077, email ifa@rigbyfinancial.co.uk or fill in our contact form and we’ll be in touch.
Which roles should you prioritise with critical illness cover?
The decision on who to cover is down to the individual business – but how do you decide?
To help, there are a few key areas of the business to look at. These include:
- Company Directors and key decision makers
- Top-performing salespeople
- Key project managers
- Employees with niche or high-value skills
For more on this, visit our ‘Which roles should you prioritise for keyman insurance?’ blog.
What level of keyman insurance do I need?
This will depend on several factors – including, most importantly, the key person’s yearly salary. As a general rule-of-thumb, this figure should be multiplied by 5 to calculate the absolute minimum level of protection that you need. For example, if a director earns £100,000 a year, their keyman insurance policy should ideally cover £500,000 (or more) in the event of death or critical illness.
You should also consider how much profit they create and how much it would cost to find their replacement. The bigger their contribution to the company, the more coverage you will need.
Other influences include:
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 several 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 to a standard they’re happy with.
Not only is the person no longer there, but you’re potentially missing out on new income, and 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.
Outstanding debts
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 an in-house or online course, or 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 it 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’s 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.
What happens to my keyman insurance if an employee leaves?
Employee retention is a much bigger challenge than it has been in the past.
In previous generations, people tended to stay in jobs for life. This is what made keyman insurance so popular – because you could pretty much guarantee your employee would stay with you for the length of the policy.
These days, while top executives may stay in the business longer (because they might have financial interests in the company), studies reveal that employees often stay in a job for just over four years, increasing the chances that a key person will leave with an active keyman insurance policy on them.
So, what can you do about it?
If you invest in a keyman insurance policy for an employee who subsequently leaves, you have a few options:
- You can stop paying the premiums and simply let the policy run out
- Transfer the policy to the keyman
If your keyman has moved on and you’d like to discuss your options in more detail, contact the team at Rigby Financial.
Is keyman insurance tax-deductible?
If term assurance is selected, the premiums of keyman insurance are usually eligible for corporation tax relief. This is subject to the plan:
- Being used to compensate for profit-loss following the loss of a key individual
- Having a term of 5 years or less
- Not being convertible
The local tax inspector will need to confirm the situation. If the policy is eligible for tax relief, any payment to the company (of the sum assured) would be taxed, as a trading receipt, at the usual rate of corporation tax. It’s important to consider this from the outset. In most cases, we recommend raising the sum assured by the keyman insurance policy to compensate for what you will lose in tax.
Some companies may require cover for longer than 5 years, in which case, a ‘whole of life’ plan is more appropriate. Alternatively, term assurance plans can also be provided on a five-year renewable basis – for all combinations of death, critical illness and total and permanent disability benefits. This allows the company to continue to cover beyond five years, but still satisfies HMRC rules for corporation tax relief.
- Learn more about how HMRC deal with keyman insurance in our informative blog or speak to one of our advisors.
Where can I buy keyman insurance?
Most Financial Advisers now offer key person insurance. But when purchasing a new policy, it’s worth speaking to an Independent Financial Adviser (IFA) – such as Rigby Financial. Our experts can offer impartial advice on the best keyman insurance policy for you. They will identify the ‘key people’ in your company and select an appropriate level of cover to make sure you are fully protected.
How much does keyman insurance cost?
The cost of a keyman insurance policy varies depending on several factors, including the insurance provider, the ‘key’ people to be insured and the level of cover. Here at Rigby Financial, our goal is to make sure your business can look forward to a secure and profitable future – and we will do everything in our power to identify the best keyman policy for you, at the best possible price.
Find out how much coverage will cost, contact us for a quote.
Get in touch with Rigby Financial today
If you would like to find out more about keyman insurance or any of our other business continuity insurance policies, please feel free to get in touch. Either call us today on 01744 886077 to chat to an expert or send an email to ifa@rigbyfinancial.co.uk for further information.
