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Business owners: Is your firm protected against the loss of a key person?Published: July 20, 2023 by Jennifer Armstrong
As a business owner, have you considered how your firm would cope if it lost a key member of the team unexpectedly? Key person cover could provide a vital cash injection when you need it most, but it’s something many businesses are overlooking.
Losing a key person may have a devastating effect on businesses.
According to a report from Legal & General, more than a quarter of small businesses in the UK would have to close immediately if a key person died or became critically ill. A further quarter of small firms would cease trading within a year.
In fact, 15% of businesses that had already suffered an event have shut their doors. Firms that have lost a key person also said it affected:
So, even if your business continues to trade after the loss of a key person, it may not meet targets and could face new challenges.
Given the effect of losing a key person could have on business operations, it’s not surprising that it ranked as the number one concern in small companies.
Yet, the report also found that 70% of businesses had never considered or did not understand the need for business protection.
Key person protection could help your business cover profit loss
Key person protection is a type of insurance that could support businesses if they lose a key person by providing capital.
Usually, key person protection will pay out a lump sum to the business if a covered person passes away or is diagnosed with a terminal illness. For more comprehensive cover, you could also choose to insure against a key person being diagnosed with a specified critical illness.
You can choose the level of cover that’s needed for your business. Often, this is linked to the key person’s salary. For example, the cover may pay out five times their annual salary.
You could use the payout to:
-Replace lost profits
-Manage cash flow
-Recruit and train a new employee.
In essence, key person protection may give your business the capital it needs to continue operating while you recover from the loss of a vital team member. It could mean the difference between your business surviving a loss and having to close its doors.
If you’re considering key person protection, it’s essential you choose the right level of cover for your business. You should consider how much additional capital your business would need to maintain operations and in what circumstances it would be necessary.
Generally, the more comprehensive the protection and the larger the potential payout, the more the premiums will be. However, it’s worth comparing options and you should make sure you understand exactly what is covered.
Who is a key person in your business?
The Legal & General report found that 63% of businesses say they have more than one key person. So, who should your policy cover?
As a business owner, a good place to start is you. If your business would struggle to operate without you, protection could help preserve your legacy or mean it’s able to continue operating during your recovery if you suffer a serious illness.
A key person could also be an employee that:
-Is part of your senior management team
-Has technical knowledge that’s important for keeping your business running
-Is vital for sales and increasing the profits of your business
-Works closely with customers or manages important relationships.
Take some time to consider the contributions of your team and the role they play in the business’s success.
-Who is essential for the smooth running of your business?
-Who plays an important role in the business growing and meeting targets?
-Do any employees have skills or experience that would be difficult to replace?
With this information, you can start assessing what level of cover is right for your business to provide security and peace of mind.
Contact us to create a comprehensive business protection plan
Protecting against the loss of a key person isn’t the only step you can take to improve the security of your firm. For some businesses, shareholder protection, loan protection, or another type of cover could also add value.
While you’re reviewing your business’s security, it may also be worthwhile to assess your own protection. Key person protection would pay out a lump sum to your business, but how would your family cope if you passed away or were too ill to work? Critical illness cover or life insurance may be appropriate and could improve the financial security of your loved ones.
If you’d like to talk about the steps you can take to protect your business and family, please contact us.
Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
Note that insurance plans typically have no cash in value at any time and cover will cease at the end of the term. If premiums stop, then cover will lapse.