What is Key Person Cover?
What is Key Person Cover?
Every business has at least one person that is the chief cog - the main moving part that keeps all of the other pieces moving. With them, the business runs as it should and all the moving parts can function.
Without them, it’s a different story altogether - they may be able to move, but they’re no longer part of the overall momentum and it’s not long before all of the moving parts come to a grinding halt.
This is where Key Person Cover comes in…
Key Person Cover is a type of insurance policy that businesses like yours can take out to protect the business from the impact of losing key members of staff. Think about your business - do you have directors, salespeople, or any staff members with unique skills?
If they were absent through ill-health (or worse), how would this affect your business? For most businesses, this could be extremely detrimental to how things are done.
The insurance policy can be set up to cover you against the effects of this - depending on what you opt for, the policy will pay out if the insured person dies, or if they suffer from a critical or terminal illness. The insurance policy may also pay a lump sum out if the key person is diagnosed with a terminal illness, and is needing to phase themselves out of the business.
The insurance policy payout is paid directly to your business or partners, helping you to continue trading or to protect your profits in the event that something terrible happens to the key person.
Why Do I Need Key Person Cover?
Any business can benefit from having Key Person Cover, but it is most important to smaller businesses with minimal key directors and staff.
Being honest - if you are a small business, the question isn’t would losing a key person affect your business and livelihood, it’s more a question of how long could it survive for?
Sadly, for the majority of small businesses, the answer to that would be pretty gloomy.
● What would happen to your business cash flow if your best salesperson was off work for a long period of time, or had to leave the business due to ill health?
● Could your business sustain itself with the loss of revenue being generated from core people being absent?
● What if one of your Directors died and their funding stopped suddenly?
● Could you cope financially if companies you owe money to started calling in their invoices early?
● Would you be able to pay business debts that were being covered by key directors or investors?
Most businesses live very hand to mouth for a LONG time while they build themselves up. Whether you are still in that stage of your business, or you’ve managed to work your way past that into a more financially stable position, have you taken the time to put protection in place for you and your family to protect all that hard work?
If your business is built on the strength of various key people within it, and you want to protect it with the right cover, Key Person Cover is the insurance policy to go for.
It will help you continue to trade, minimise the impact on your business of the loss of the key person, and could also help to pay off any business debts you may have.
In the event that the worst happened, and the loss of the key person would completely sink your business, it may allow you to close your business down properly and potentially avoid going bankrupt. This could stop you from launching a further business later down the line so is the difference that helps you move forward again.
What Can Key Person Cover Protect My Business From?
Key Person Cover can protect your business from a number of situations...
● Recruitment costs for replacing a key person
● Lost profits while the business has been disrupted
● Paying penalties for late or non-delivered goods or services.
● Paying company sick pay to the key person if the claim is related to a critical illness, terminal illness or death.
● Protect against being unable to pay loans.
● Paying back business overdrafts.
● Short-term cash boost where nervous suppliers call in debts following news of a key person leaving the business.
● Covering owed salaries, dividends or loaned money through a director’s bank account.
Key Person Cover can also protect sole traders who are personally liable for the debts of their business from the debts being passed to their next of kin.
Any one of those benefits could be a potential lifeline - spend just a couple of minutes to ask yourself just valuable would this be for your business?
What About Critical or Terminal Illness Cover?
Some Key Person Cover policies cover against Critical and Terminal Illnesses. These can be very important to businesses where key people need to phase themselves out of the business and their absence hurts the business over a longer period of time.
Critical or Terminal Illness Cover pays a lump sum on the diagnosis of a covered condition. This can often have been paid before the person leaves the business, meaning succession planning and phasing the key person out of the business can be done with minimal impact on the business itself.
This could clearly benefit your business in this situation as well as helping your business be able to treat the key person with kindness and dignity throughout the transition out of the business. At the end of the day - their priority isn’t going to be the business if they are terminally ill - Key Person Cover will give you all the option to allow them that space without it being infused with any business panic.
How Do I Set Up Key Person Cover?
Key Person Cover by nature is a very flexible product as it needs to provide options in so many scenarios. Knowing what you need may not be obvious to you, so it’s always recommended to speak to an experienced broker who deals with Key Person Cover regularly, such as Apex.
We are able to give you the best advice by thoroughly exploring the structure of your business and putting the most important cover in place to protect against particularly terminal eventualities. Your cover will need to look at the person you are looking to insure and the number of people you need to insure with the policy.
There are only a handful of insurance providers who deal with Key Person Cover policies so make sure you opt for a trusted broker like Apex to handle your enquiry.
How Much Key Person Cover Should I Take Out?
The amount of cover taken out should normally reflect the financial impact the key person makes to the business. It will all depend upon the individual needs of the business., but you could consider:
● Multiples of profits - to cover income lost, even on a short-term basis
● Multiples of salary - to cover recruitment costs to replace staff
● Loan security - in the event of losing someone who pays the business’s debts
● Start-up capital - if you need to start a new business
For more information about Key Person Cover or if you are looking for advice on taking out a policy which you are confident has you covered, get in touch and our years of experience will help rid you of that ‘what if’ fear so many business owners have.