The loss of a key person could have a significant impact on your business and key person insurance is designed to provide an income to cover potential lost revenue plus the costs of sourcing and training a replacement member of staff.
Here’s how key man insurance works: A company purchases a life insurance policy on the key employee, pays the premiums and is the beneficiary of the policy. If that person unexpectedly dies, or becomes critically ill (if critical illness cover is added to the policy) the company receives the insurance payoff.
Key man cover is worth considering if your business relies on an individual or individuals – whether that is to design products and systems, if they have specialist skills that are important to the running of a business or to generate new business or they may be the crucial link between your business and others that on their death may impact the ongoing relationship.
What to consider
•Replacement of lost profits
•Cost of recruitment of replacement personnel
•Repayment of partners’/directors’ loan accounts
•Length of time before the key person is due to retire
You should try to estimate the value of the key person by assessing the financial loss that might incur through their death or critical illness. The calculated loss could include the cost of recruiting/training, increased project running costs and loss in credit standing and other factors.
If you have an employee who’s death could impact the profitability of your business it would be sensible to talk to an independent financial adviser about how to provide for this eventuality.
If you have any questions or queries on this topic, please feel free to leave a comment or contact us here.