Key person insurance offers protection against financial hardship caused by the loss of a key person in a business. Read on to find out the answer to the question ‘how much does key person insurance cost?
It is estimated that as many as 60 per cent of businesses could fail within a year of losing a key employee, highlighting the importance of key person insurance. This form of business life insurance is surprisingly affordable and worth its weight in gold if the worst should happen and a vital person within your business becomes seriously ill or dies. If you are thinking about investing in key person insurance, you may be wondering ‘how much does key person insurance cost?’
In this article, we discuss what key person insurance is and how much it costs.
What is key person insurance?
Key person insurance is a type of business life insurance that offers a means of protecting your business in the event of the loss of a key person. Also known as key man insurance and described by a LinkedIn article as ‘a life preserver’ for business (https://www.linkedin.com/pulse/how-survive-loss-key-person-other-man-life-insurance-tips-marshall/), it offers a means of insuring your operations against financial losses that could occur if a key worker dies or becomes incapacitated for a long period.
It is essentially a form of trauma or business life insurance policy that is used for business protection purposes. As explained on the Association of British Insurers’ website, it is designed to cover a key person on whom profitability, and even the business’ very existence, depends.
Key person protection is written on a key person’s life but is owned by a business and, in its purest form, is a business life insurance policy. Critical illness cover can then be added to create a more comprehensive policy.
How much does key person insurance cost?
The outlay on key person insurance can be worth its weight in gold when you consider the impact that losing a vital link in your business chain can have. Losing someone vital to your credit line can have serious consequences, for example, as can suddenly find yourself without a vital point of contact for clients. Forging bonds and establishing new links takes time and many businesses may not have the funds to weather the storm during this transitionary period.
The funds from key man insurance are designed to bridge this gap and cover business essentials such as replacing staff, making up for profit losses, and ensuring that companies can continue to meet financial demands such as loan repayments. It can, quite simply, protect a business from going under and demonstrates the importance of relevant business insurance for companies of all sizes and in all sectors.
How much key man cover do you need?
The cost of this form of business life insurance will depend on how much cover you require. The amount of the cover you need is based on how much the loss of your vital person is likely to be. In general, many companies choose to use one of three formulas to come up with the amount of key person cover required. These are:
– Ten times the key person’s income.
– Double the business’ gross profit resulting from the efforts of the key person.
– Five times the key person’s contribution to the firm’s net profit.
To work this out, it is most effective to use an average of profit figures for the last two years. It is also important to consider other business-specific factors. This may include the need to cover a loan that will have to be repaid upon the death of a key person in the business.
Factors affecting the cost of key person insurance
Along with the amount of cover you want and need; other factors may determine how much you will pay for your key person insurance. This includes the length of time you want this form of business life insurance for and the kind of business involved. You will need to decide whether you want to increase or level life insurance cover or whole of life cover, and this will affect the premiums you will have to pay.
There are also other options to consider which will affect the amount you will pay. The accidental death benefit will generally be included automatically, but you may also decide you want the ability to change the policy in the future or want to add critical illness cover.
Tax and key man insurance
The cost of key man insurance can be offset against your company’s tax bill, although this will depend on the current legislation. At the time of writing this guide, businesses meeting certain criteria could treat key man insurance premiums as allowable business expenses and use these to reduce Corporation Tax bills. You can read more about insurance and tax in our Can I Claim Life Insurance As A Business Expense? guide at https://wisbusinessprotection.co.uk/guides/can-i-claim-life-insurance-as-a-business-expense-uk-wide/.