Key Person (sometimes referred to as Key Man) insurance is taken out by businesses to protect against the financial loss that could result from the death of a key individual or employee. The insurance provides financial compensation for the loss of the key individual to the business.
So who is a key person?
A key person is an individual whose skill, knowledge, experience or leadership contributes to the continued financial success of the business. In a small business, this is usually the owner or the founders but it could equally include:
• The Managing Director
• The Marketing Manager
• A Computer Specialist
• A Sales Manager
But surely everyone is important – how do you choose who is a key person?
That’s true, but in order for a business to insure one of its employees it must show that it stands to suffer a financial loss of profits as a result of the death, terminal or critical illness (if chosen) of that employee.
How does the insurance work?
The key thing to remember here is that it’s the company that received the pay-out to ensure its survival. A company purchases a life insurance policy on its key employee(s) and if a key person unexpectedly dies, the company receives the insurance payoff.
The company can use the insurance proceeds for expenses until it can find a replacement person, or, if necessary, pay off debts, distribute money to investors, pay severance to employees and close the business down in an orderly manner. In a tragic situation, key person insurance gives the company some options other than immediate bankruptcy.
When you don’t need Key Person Insurance
If the company is a sole proprietorship and employs no other employees or dependants, then key person insurance isn’t as necessary and a standard life insurance policy should be taken out instead.
Now here’s a very important message – don’t confuse key person insurance with personal life insurance. If you have a spouse and/or children who depend on your income, then you should have personal life insurance for that purpose regardless of whether you are included on a Key Person Insurance Policy.
So how do you calculate the sum insured?
Well that’s a tricky one. There’s no golden rule. You should consider the effect of the loss of the key person on the business including whether this would directly impact on the profits, how much it would cost to find a replacement and any additional training costs that may be incurred to bring that person up to speed.
Key Person insurance can be a complicated topic. Credius will provide expert independent advice and have access to a wide portfolio of products to match the most demanding of requirements. To ensure you have the best policy in place for you and your business find out some more information here at our website, or why not contact us today at email@example.com or call on 020 7562 5858 for a free consultation.
Next time – How to understand your insurance needs