Key Person Insurance

Providing a financial safety net if a key profit earner of the business dies or is diagnosed with a critical illness.

Protecting businesses from the loss of a key person

Key Person insurance provides the funds to support the business through transitional and challenging times and helps to return the business to the state it was in before the loss of the key person.

How does Key Person Insurance work?

Key Person cover is life insurance (which can also include critical illness cover) taken out by a business on the life of someone crucial to the firm’s profits.


In the event of a claim, the proceeds from the policy give the company a cash injection, helping the business operate as normally as possible.


The policy insures the life or life and health of the key person and the business is named as the benefactor and receives the proceeds.


The amount of cover is normally calculated by looking at the key person’s contribution to either gross or net profits and allow time for recovery following the loss of the key person’s contribution to the business.

Who is a Key Person?

The profit of the business may come from just a few key people. A key person is someone whose death or serious illness would have an impact on the finances and profits of the business, either directly or indirectly, and potentially the ability to continue to trade.

 

A key person could be the business owner, director, salesperson or any employee with specialist skills or expertise.

More about Key Person

A key-person is an individual who is vital to the success of a business. The loss of a key person’s specialist expertise or skills could severely impact the business. It could be the company owner, director, salesperson or any employee who would be difficult and costly to replace.

A person may be key to a company because they:

  • are a key sales person who contributes a significant amount of profit;
  • are one of the founders, and still the main driving force of the company;
  • are a controlling director who has personally guaranteed loans made to the company by a bank – the bank may insist on life protection as a condition of the loan;
  • have valuable sales contacts, which might be lost if they died;
  • are heavily involved in the development of a new product because of their knowledge and expertise -without their input, the product launch might not go ahead, or
  • are at the top in their line of work and have been time-consuming and expensive to recruit. It might be difficult and expensive to recruit their replacement

Key Person Protection allows you to insure your business against any financial loss of losing a key member of the team who contributed to the profits.
It gives the business a valuable cash injection that can be used to:

 

  • Recruit or train a replacement
  • Protect profits whilst the business is disrupted
  • Pay back business loans or overdrafts
  • Covers salaries and bills
  • Protect against the loss of important personal or business contacts
  • Protect the loss of goodwill which could have a direct impact on raising capital for the business or attracting new investors
    Protect against customers and suppliers losing confidence in the business
  • One of the most important benefits is that it buys the business time to make the right decisions, not rushed ones

Key Person cover is life insurance (which can also include critical illness cover) taken out by a business on the life of someone crucial to the firm’s profits. In the event of a claim, the proceeds from the policy give the company a cash injection, helping protect profits or clear business debt.


The policy insures the life or life and health of the key person and the business is named as the benefactor and receives the proceeds in the event of a claim.


The amount of cover is normally calculated by looking at the key person’s contribution to either gross or net profits and allow time for recovery following the loss of the key person’s contribution to the business.

Small businesses are far more likely to have one or two significantly important people who the business relies on to succeed.

 

However, established companies have larger overheads, so if the loss key individuals affects revenue, the consequences for the business could be serious.

  1. The business takes out a policy on the key employee – this is referred to as ‘life of another’;
  2. The business pays for the premiums and is the beneficiary of the insurance policy in the event of a claim being made;
  3. If the insured employee dies within the term of the policy (or is diagnosed with a critical illness if this is included), the company will receive the pay out.

 

For limited companies and limited liability partnerships, the firm would typically be the applicant and would own the policy and pay the premiums.

 

For partnerships, one of the partners would typically own the policy with any proceeds paid via a trust to all the partners.

Things to consider when deciding whether you need Key Person insurance:

 

  • Does the business have any key individuals who contribute heavily to profits?
  • Has the business identified these key individuals (it might be you)?
  • What unique skills and contacts do they have?
  • Does the business have any unprotected loans or debts?
  • How long would it take to replace the Key Person?

Case study – Biotech & Vaccine Research

Profile

  • Incorporated in early 2017, the company researches and develops biotechnology, primarily in the field of disease prevention and vaccine research.
  • In the last two years, the company has raised $30million in Series A equity financing and £15m in government funding.
  • The company has several pipeline projects developing vaccines to counter life-threatening diseases for babies and children.

Our assessment

We found that the business was heavily reliant on the CEO for its stability and position to date. We identified that this person was the key person in the business.

 

The other directors, although vital, were ultimately replaceable. The CEO had crucial knowledge, patents, shareholding and agreements in place, that if they were lost from the business, would seriously impact its stability and affect investor confidence.

Solutions we put in place for the business

Key person policy to cover the CEO for life or earlier critical illness. We based the sum assured on the expected impact, day-to-day running costs, recovery time, and replacement (recruitment) cost.

 

Share and Ownership policy to purchase shares from benefactors to retain control of the business. Premium equalisation due to the varying ages of the shareholders.

Experience you can trust

Speak to us to discuss your requirements and the options available, book a call (no obligation) to speak to one of our advisers here.