It is a sobering thought that nearly half of the businesses here in the UK would fail if a key member of staff were to become seriously ill or die.
But according to research undertaken by Legal and General, it is a fact. A quick look at the Deaths by Single Year of Age Tables – UK on the Gov.UK website makes sobering reading.
This is precisely why it is important that forward-looking, responsible business owners and directors should be aware of the consequences that losing key decision-makers can have and take appropriate protective action by way of Key Man Insurance or appropriate company life insurance.
But which of the two types of insurance should you opt for? Should you go for key person insurance, or should you opt for life insurance? Which would be the most relevant life insurance to take out?
Both of these products are forms of life insurance which have been created to protect companies and the people they employ. Having said that, there are a few important, basic differences. So, when considering key man insurance vs life insurance, you need to fully understand the benefits and limitations of each.
The basic difference between key person insurance and life insurance
In essence, key person insurance is designed to protect the business, whereas life insurance is designed to protect your workers and their families. Both types of insurance are owned and paid for by the company, but it’s thereafter where things change.
Let’s take a look at each of the life insurance types:
The benefits of key person insurance
The term key man insurance is pretty much self-explanatory. It is meant for smaller businesses that have one person or a small number of people whose roles or functions are key to the survival of the business.
Statistics show that one in every seven men die during their working lives. For women, the figure is one in every eleven. In addition, there is always the risk that key, senior members of staff could suffer a heart attack or could suffer a significant illness that keeps them from work for several months or even years.
Key man insurance provides a lump sum of cash when the services of such a key person are no longer available. It can be used to fund a short period of transition while corrective manoeuvres are being taken or, at worst, can be used to help stave off bankruptcy.
Key person insurance can also be used to underwrite a business loan. Many lenders insist on having key man insurance in place before releasing loan funds. In other words, they use it to mitigate their risk.
When key person insurance is instigated in order to offer protection against a business loan, it is unlikely that the premiums will be tax-deductible. The reason you may not be able to claim any tax back is that the payout benefits the borrower instead of protecting the continuity of the business.
The benefits of life insurance
Personal life insurance policies cover individuals, and in the event of their deaths, payouts are made to the spouse and children. Policies can be structured to either cover the costs of funerals or be paid out in instalments over a specific period of time to maintain the standard of living for surviving beneficiaries.
Life insurance policies of this nature can be created as an investment or as protection. In both cases, they benefit the family of the insured and not the company.
Key man insurance vs life insurance: Why you may need both
If you are starting up a new company or you are reviewing the exposure of an existing company, making sure you have the right insurance in place is of paramount importance.
We’ve talked about key man insurance vs life insurance, but that is only to emphasise the different covers between the two. However, it could be that you ought to have both types of cover in place to effectively protect your business.
There’s no time like the present
If you would like more information on either, or you would like to discuss instigating appropriate insurance to safeguard both the business and its employees, please contact us here at WIS Business Protection today on 0203 011 1968 or visit our website.