What Is Key Person Insurance?
When you’re setting up a business, there’s no end of important things to consider. The most exciting aspects are all to do with sales, product, and strategy, but at some point, you also have to start thinking about safety. That’s where insurance comes in – and it’s an expense that many businesses resent having to pay. That’s understandable. Paying for insurance is a little bit like paying for fire safety equipment – it’s an ongoing expense that you hope you’ll never have to use, and if you never use it, it’s dead money because you’ll never see a return on it.
Seeing insurance as dead money is certainly one way to look at it, but the other perspective is that it’s the money you’ll be most glad you spent when you need it the most. Operating a business without the proper insurance in place is like taking all your profits and putting them into a mobile slots UK. Everything is fine when you’re winning, but eventually, you’re inevitably going to be unlucky and lose. If you don’t have any more cash to put into the online slots game when that loss arrives, it’s game over. In business terms, that would be catastrophic. It’s an unacceptable level of risk, and you can mitigate it with the right type of insurance. Leave the business of online slots to the professionals, and ensure you have the correct level of cover in place!
For a lot of businesses, that ‘correct level of cover’ is a type of insurance they may never have come across before, and that’s ‘key person insurance.’ if you own a small-to-medium sized business you may already be rolling your eyes a the idea of taking on another form of insurance, and we don’t blame you. You already have public liability insurance, contents insurance, life insurance, health insurance, and serious illness insurance to worry about, and if you’re paying for them, you probably wonder what the point of yet another policy is. Despite that, it’s a sad fact that the majority of businesses are underinsured, and that’s not always because they don’t have any policies – they just have the wrong policies. Let’s look at the finer details of what Key Person Insurance does for you.
What Is Key Person Insurance?
When it comes to defining what this type of cover is and what it does for you, there’s a big clue in the name. Key person insurance is a type of life insurance policy that protects a business against the death of someone who plays a vital role in that business. It isn’t a type of cover that you’d want to put in place for all of your employees. Typically, it covers the CEO and two or three irreplaceable members of staff or business partners. Think about your business, and in particular, think about the people you would struggle to replace or cope without if they passed away tomorrow. These are the people who could and should be covered by such a policy.
One of the main differences between normal life insurance and key person insurance is that the person insured doesn’t pay for the policy, and nor do they own it. The company owns and pays for the policy, and if something happens to the person covered by it, the value of the policy is paid to the company. That money can then be used either to mitigate the financial impact of losing that key person and hopefully ensure the company can keep running until a suitable replacement can be found and installed. In a small company, this is absolutely essential, as there are likely two or three people who are critical to keeping the company running. If any of them were to pass away suddenly, the company would suddenly be in serious difficulty.
You might think that this type of policy is irrelevant if the key individuals within the business already have life cover of their own. Firstly, you shouldn’t make the assumption that they are – more than a quarter of all adults in the United States of America have no life insurance at all. Secondly, an important employee or partner having their own insurance doesn’t necessarily benefit you at all. Private policies are there to provide for the family of the deceased if the worst were to happen – not to provide for their businesses. Unless you or your company are specifically listed as beneficiaries of their policies, which is highly unlikely, you won’t see any return on that policy at all. Key person insurance isn’t something that people should have instead of their private cover – it’s something they should have in addition to their private cover.
To put it in its bluntest terms, key person insurance is there to make the worst situation imaginable for a business slightly better. Keeping the wheels turning until you can replace the person who’s been lost is the best-case scenario, but in the worst case, it means that creditors can be paid off, and a business can be closed down in an orderly fashion if it’s impossible for it to continue. It’s a better and less damaging option than bankruptcy, and it at least means nobody – including the surviving members of the company’s senior management team – is left out of pocket in the wake of a tragedy.
Hopefully, we’ve now underlined the role of key person insurance, and how vital it is that the people with the biggest responsibilities in your business are adequately insured. There’s no right or wrong level of cover to chose – that will depend on the value of the work the individual being covered by the policy does. As a rule of thumb, a key person should be covered to the value of at least one year’s worth of the value they bring to your company. That isn’t the amount of money you pay to them – it’s the amount of money that they make for you, plus any further costs likely to be incurred by their sudden absence such as lost clients or canceled deals. Take the time to speak to an insurance professional about your situation, and make sure you have the right policies in place to give you peace of mind.
