Key person insurance, also called key man insurance, is one of many different types of insurance aimed at businesses who want to protect themselves from potential disaster when key members of staff fall ill unexpectedly. Life expectancy in the UK is slowing, with the Covid-19 pandemic marking the worst decrease in average life expectancy since World War II. If your staff are your greatest asset, it’s important to protect this asset by taking out relevant insurance policies that could support your business even when critical members of staff are unable to work. In this article, we will explore key person insurance: how it works, who it’s for, and why you might consider taking it out.
Key person insurance: how it works
Key person insurance offers protection to businesses in the event that a key staff member dies or falls ill with a terminal or critical illness. The purpose of key person insurance is to provide funds to a business that can be used to quickly find a replacement for a key person within the business, with minimal disruption to business operations and performance.
Key person insurance is an essential component of any business’s risk management strategy. It protects businesses by paying the beneficiaries if a key person dies or becomes unable to do their job due to illness or accident. This is particularly useful for companies that rely on key members of staff, such as CEOs, partners, or technical experts.
Why is key person insurance important?
Key person insurance is not a legal requirement for businesses in the UK, which is why many businesses overlook this form of insurance. However, in the event that it is needed, it can have a significant positive impact on the future of any business. When a key person is lost suddenly, this can have serious consequences for any company:
• Customers lose confidence in the business
• Banks may call in loans if they fear profits will fall
• Suppliers may start asking for payments upfront
• Stakeholders will lose confidence and performance can suffer
• Employees might lose motivation to work hard
For businesses who rely on not just an entire body of staff but key staff members, in particular, key person insurance could help a business to survive even the most sudden and damaging loss.
What is a key person?
The definition of a key person is any member of staff that is vital to business operations. Collectively, all staff members are important, but some staff members are very difficult to replace and it can seriously impact a business if they are away from work for even a week. Key persons can be important because of their skills, knowledge, experience, or leadership abilities, and they can be found at almost any level of a department, including executive and creative departments.
Once you understand key person insurance: how it works and why it exists, you should be able to identify those key persons within your own company that may need extra protection. If your business would struggle to succeed without them, or their loss might lead to a widespread loss of confidence both inside and outside of the business, they are key to your business and could be covered by key person insurance.
When does key person insurance apply?
Key person insurance pays out if:
• A key person dies.
• The key person becomes unable to do their job due to illness or accident. A key person can become ill with a terminal condition or be diagnosed with a critical illness that means they are no longer able to work.
If you’re concerned about the terms of your key person insurance policy, it’s important to talk to your provider to gain a greater understanding of what your policy covers and when it pays out. For example, you may want to know more about what is meant by ‘critical illness’; this term usually means long-lasting, serious conditions such as heart attack, stroke, loss of limbs, or diseases like cancer and multiple sclerosis.
What other kinds of insurance can help businesses?
Alongside key person insurance, other kinds of insurance policies can help businesses to protect their assets in the event of unexpected illness. Critical illness cover can be used to cover key persons who are unable to do their job due to accident or illness related to a specific body part. Key person life insurance could also be used to pay key persons’ beneficiaries if they die. Offering your staff relevant life insurance can also give your employees and their families peace of mind even if the worst happens.
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If you’d like to know more about how you can protect your business from unexpected illness, contact us today to find out more.