What is key person insurance?

The past few years have been extremely difficult for businesses. It’s these uncertain times that can really affect the growth and continuity of a business. One area that is sometimes overlooked for business continuity is key person insurance.

What is key person insurance?

Key person insurance offers a financial cushion to support your business in the case if the sudden loss of a specific individual. It helps the business to adjust to any adverse effects on its operations.

A key person insurance policy will pay out in the event of a death or serious illness. It essentially buys you and your company time to find a new person or to implement other strategies, for example to save, sell or shut down the business.

Who needs key person insurance?

It is common within small businesses to find the owner or the founders as the key individuals to the success of the business. Other times it is one key employee. The absence of the key individual(s) could have a huge impact on the company and cause major financial harm. What is key person insurance? It’s essential for anyone looking to safeguard their business. In fact 59% of small businesses believe that they would cease trading within a year should one of their key people die or contract a serious illness (Legal & General State of the Nation SME Report, 2021), while only 14% of smaller SMEs have business continuity plans in place (Aviva, 2023).

What can key person insurance protect against?

There are several key features to key person insurance:

It is not treated as a P11D benefit
Replacement of lost profits
Cover the cost of recruiting replacement staff and training
Repayment of partners’/directors’ loan accounts

The cost of losing the expertise, skills or knowledge of such individuals/employees has never been as greater than now in these current tough economic conditions, where businesses find it extremely difficult to employ such workers. By having such policies in place, it would give you that peace of mind and continuity that you crave as business owners in such events.

Which businesses can take out key person insurance?

Business protection is available for partnerships (including limited liability partnerships), shareholders and sole traders and by acting now, it could ensure that all your years of hard work in establishing your business and making it a success is not wasted. To have a plan in place to safeguard the future is essential for any successful business, and that key person insurance should be part of your plan.

When we carry out a business review at Francis Clark Financial Planning, key person insurance is introduced alongside other protection policies and legal agreements to ensure we give the business the best possible chance of carrying on in the event of an untimely death or serious illness.

We can have a look at business loans protection polices to be used to ensure repayment of a business loan, or we can explore your options in shareholder or partnership protection. This ensures that control of a business remains with the surviving owners, rather than passing to someone who is unwilling or unable to run it. It also prevents the sale of shares to a competitor.

If you would like to discuss how key person insurance or other business protection insurance could protect your business, please get in touch.