Businesses often need several different forms of insurance to protect themselves and their employees. Fleet vehicles require insurance. And assets need to be insured also.
One area of insurance that many business owners may not be aware of involves protecting against the loss of key employees. If a business loses an integral member of its team, it can have wide-reaching repercussions.
Losing a key employee prematurely won’t only be emotional. It could be financially disastrous for a small enterprise. Even big businesses are impacted when they lose key members of the board or heavy-hitting sales staff.
What is key person insurance?
This type of cover is effectively a life insurance policy. Businesses may take this policy out to protect against the sudden passing of certain vital employees.
This type of insurance provides an amount of financial protection for businesses which they may need when they lose key employees. Key person insurance may also protect against serious accidents or disability. In the event that a key employee is no longer able to work, the insurance policy will pay out.
For a better understanding of the basics of key person insurance, you can gain further information and quotes here. However, this brief article aims to give you an outline of why your business would benefit from key person insurance.
How does key person insurance work?
A business’s owner selects key employees they feel are integral to their business operations. Insurance policies are then signed and paid for. If one of these employees becomes incapacitated or dies, the insurance provider will pay out.
Just as with all types of insurance policies, the cost will be determined by a number of factors and metrics.
Factors determining the cost of key person insurance
- The amount of cover needed
- Smoker/non-smoker
- Employee’s responsibilities
- Employee’s salary
- Employee’s current and past health
- Employee’s position
- Employee’s age
- The nature of your business
The criteria will be largely similar to standard life insurance but with a few exceptions. The impact made by the loss of the employee will have a bearing on the cost of the policy, and the amount paid out. Costs will be incurred with the loss of a key worker, and these need to be covered by the insurance policy.
Risk factors will be assessed too. How old the employee is and their current health will determine the cost of your insurance policy also.
About 20% of UK businesses close in the first year. This is often due to cash flow or financial problems. The money paid out from key person insurance should enable your business to operate as usual in the event of losing a vital employee.
What is the importance of key person insurance to your business?
Key person insurance provides financial protection. If your business loses a vital member of the team, you might see a significant financial impact. Your business may also struggle to keep making progress.
You may be planning to take your small enterprise to the next level. But, losing a vital technical expert or the top salesperson may result in the wheels coming off, at least for a while.
Some gains from key person insurance are as follows
- Business continuity
- Peace of mind
- Protection for shareholders
- Financial protection
- Creditworthiness
- Reputation
The payout from key person insurance will help to manage debts and result in maintaining a good credit rating. Your business’s reputation will remain intact as orders are met, and suppliers paid as usual.
Shareholders are equally protected by the continuity of business operations. And of course, you will have a certain amount of peace of mind that insurance brings.
The risks of losing key employees and the impact on your business
No insurance policy can safeguard against losing a valued employee. But, key person insurance will protect against the financial impact at least.
There is great importance on employee wellbeing now. As there should be. However, life sometimes delivers unpleasant surprises. There are a number of risks in losing key employees, and not having insurance in place.
Loss of competitive advantage
When a key employee is highly knowledgeable and talented, they may be somewhat unique. Losing them could put development behind and weaken your business’s position in its market.
Disruption to daily operations
As mentioned above, continuity is vital in business. Losing key employees may hinder daily business operations and cause delays.
Businesses will be disrupted by the need to replace such important employees. And the loss of a respected key worker may lead to lower staff morale. Some things can’t be fixed with key person insurance, but a payout will help your business return to normal as soon as possible.
Who should you cover with key person insurance?
Key person insurance is generally aimed at those employees who are vital to the success of a company. To this end, the people you choose to insure will be entirely down to you.
Typically, the following might be insured
- Executives including the CEO or CFO
- Founding members
- Top salespeople
- Anyone with unique skills
- Technical experts
Someone heavily involved in past and present research and development may warrant key person insurance. Your top product designers and the board of directors too.
What financial benefits are there for key person insurance?
Insurance policies tend to pay out either one lump sum or an annuity. This will be made clear when the policy is drawn up. And obviously, this provides some financial protection.
The financial benefits include replacing lost revenue, and covering debts due. Being able to continue operating should ensure your share price remains stable also.
One financial benefit is recruitment.
When you lose a valuable employee, a replacement will be necessary. The average cost of employee recruitment is £3,000. Replacing a talented and top-level employee could be significantly more.
Scouring for a suitable replacement for your CFO for instance, could take considerable resources and time. Key person insurance gives financial protection against these costs.
When should key person insurance be put into place?
Visiting mykeymaninsurance.com gives a few insights into how key person insurance should be utilised. Key person insurance should be taken out when an employee is first hired in some instances.
If your business has headhunted a highly talented individual, then key person insurance could be taken out straight away.
In many cases, businesses take out policies on key employees once they become invaluable. If your business is relying on the skills and knowledge of any particular employee then it is time to insure against their loss.
It is vital that insurance is taken out before any unexpected event occurs. The best practice would be to review key personnel regularly and decide whether insurance is warranted. When insurance policies are already in place, this review helps to establish if any situations have changed. Therefore, you will have a chance to adjust insurance cover accordingly.
Summary
Key person insurance is a vital type of cover for any business reliant on certain personnel. The loss of a valued employee will be emotionally distressing. But, it also causes serious financial implications for businesses too.
You can protect your business with key person insurance in many ways. Your business will be able to continue running. Suppliers will be paid on time. And your business’s growth may continue.
