During these challenging times, you may have considered what would happen to your business if one of your key employees were to die or become terminally or critically ill.
Whilst it’s a bit of a cliché, many businesses will choose to protect their office premises, equipment, machinery and cars via insurance, but not their most valuable asset; their people.
When you lose someone key to your business you not only have to deal with the emotional impact that this will have on your staff but also the financial implications.
Time will be needed for you to get back on your feet however you are likely to see a loss of profits and possibly even confidence in the business, all at a time when the bank may be less willing to offer loans to see you through this period. It’s also likely that any Directors loans and personal guarantees will become payable.
Key Person Insurance can protect your business from the financial impact of losing a key member of staff. Put simply, you can insure the life of a key person in the same way you would arrange insurance for yourself, but the company owns the policy, pays the premiums and would receive the payment from the insurer.
Who is a key person?
This can vary and will depend on the circumstances of your business. It could be your business owner, whose contacts and relationships are unique or a technical expert whose skills would be difficult and expensive to replace. Basically anyone whose death or illness would have a significant impact on the financial position of your business can be key.
How does it work?
Key Person Insurance can pay a regular income if the person is unable to work because of an illness or injury, or more commonly a lump sum if they die or are diagnosed with a terminal or critical illness.
Your business can use the funds to help replace profits over the short term, pay off a loan including directors loans linked to the business, or pay recruitment costs and a possible golden hello for a replacement. Basically anything that you need to do to survive.
How much cover would you need?
If your business needs to provide protection for a loan this is relatively straightforward, as the cover can reflect the loan amount. We can arrange a policy where the lump sum reduces in line with the payment and often the interest rate can be tracked to some degree too.
If, however, you need to calculate how much the key person is worth to the business this can be a little trickier. Broadstone will be happy to guide you through this process to ensure you take out cover that accurately reflects the potential loss to your business.
How much will it cost?
You decide how much financial protection the business needs and we can provide you with some indicative costs. The final premium will depend on the following;
- How much cover you need
- How long you want to insure this for
- The type of benefits you want to insure
- Age and health of the key person
- Whether they smoke or vape (nicotine products)
- Any hobbies or pastimes that are considered to have a risky element– g. Cave Diving, Motorcycle racing
Sometimes the insurer may need to ask for more information to reach a decision, such as a report from a GP or a recent Medical Examination or it could be financial information if you need a high level of cover.
Broadstone takes a whole of market approach to ensure that we find an insurer that meets your needs, provides a solid level of protection, at an appropriate price with an excellent record for settling claims. We will also ensure that you fully understand the tax treatment and implications of any policy you place.
What policy benefits should we cover?
The majority of Key Person policies will pay a lump sum to the company should the person die during the policy term, but the chance of them suffering from a critical illness is actually significantly higher. We would recommend that some element of Critical Illness Benefit is included within the policy.
Insurers include a broad range of Critical Illness conditions within their policies and the lump sum would be paid if the key person suffers from an illness that is included in the policy. The vast majority of claims payable are due to three main conditions: cancer, heart attack and stroke.
Can we still place a policy in the current climate?
The insurance market is still reacting to the unprecedented circumstances we find ourselves in but many are still open for business. The main issue will be obtaining medical information if this is required, as it’s unlikely GPs will be able to complete non-essential medical reports for their patients.
The market is responding to this, and some insurers have increased their limits for the level of cover before they need to ask for medical information. Some are actually piloting a virtual medical examination.
If you would like us to provide you with some advice and some indicative figures please contact your Risk & Healthcare Consultant.