In today’s uncertain economic atmosphere, you need to elevate your risk assessment and evaluation capabilities more than ever. Your business’s long-term survival and success will depend on your ability to access dynamic tools, market insights, and well-informed experts. Does your company have such a key person?
Human resource is vital to your business success; employees practically oversee the day-to-day running of the company. Some are so valuable that should anything happen to them, the company’s operation halts.
Does your company have such a key person? What efforts have you put to protect them from any potential risks? Don’t worry if you haven’t done much because we’re here to help you re-think risk.
What is keyperson insurance?
Key person insurance is a policy that protects businesses against financial difficulties in the event of losing a valuable member of the team. If a key person dies or gets diagnosed with a critical illness, the policy compensates the business for the losses incurred.
A business will therefore buy this cover to insure itself against financial losses due to the loss of a vital employee. In essence, the company buys the policy, pays premiums, and remains the sole beneficiary, meaning it’s entitled to compensation if the person insured dies.
So, who qualifies to be a key person? Anyone who has skills or knowledge that’s unique to them. They could be the founders, owners, best-in-class salespersons, or top executives in the company.
Why is key person insurance essential for your business survival?
Following the demise of a key person, a company can lose a significant amount of short-term profits. And if the business has no solid recovery plan, its long-term survival also hangs in the balance.
Like we mentioned earlier, human resource is the engine that drives any organisation – there’s no doubt about it! For most businesses, only a few specialists and critical decision-makers are mandated to close key commercial deals and run the vast majority of pillar processes.
So, how can a business cope if such significant figures die or suffer permanent incapacitation that rules them out of work for extended periods? This right here is a dilemma that key person covers seek to solve.
When is key person insurance most necessary?
Ideally, key person insurance is a must-have for any serious business, regardless of its size or experience. But there are circumstances when lacking such a cover puts the business’ survival in great jeopardy.
First, key man coverage is critical when the firm is new to the market. At this point, the business relies on only a few capable persons to oversee its operations and growth.
The coverage is also considered vital in established firms when they introduce a new technology or a special department. To protect the new (and often rare) resources, the firm might need to insure the new staff to leverage their skillset for growth.
Finally, small businesses at risk of losing hard-to-replace founders can also take advantage of key person insurance. The loss of these individuals will often mean lost ideas and management, and the reason small businesses need to reassess their risks and secure key person coverage.
What risks do key people face?
According to a report by Oxford University, the cost of replacing an ordinary employee is more than £30,000. This amount caters for the recruitment and training expenses, lost time, and output while searching for a replacement.
And this is only an ordinary employee.
The cost of losing a key person will be a lot higher, usually in thousands of pounds and within a very short period. Such a loss also paralyses the overall performance of the business, and in worst-case scenarios, it may even cause irreversible damages.
These statistics help to underline the importance of purchasing key person insurance for any-size business. The last thing you want to deal with when running a thriving business is to struggle for survival due to the death or sickness of a vital employee.
A summary of the benefits of securing key person insurance to the business
- The policy serves as a source of motivation for the key person as they feel secure and wanted in the company.
- In the event of a critical person’s departure, the company will be able to find a replacement quickly and without incurring a lot of costs.
- Key person insurance proceeds help to settle off debts, pay investors, and avoid insolvency in tragic situations.
- The proceeds make up for the loss of revenue caused by the temporary disruptions in business operations.
- Premiums are not tax-deductible, and if the key person passes, the company gets the full proceeds tax-free.
- The business is the sole beneficiary and gets the full insurance payoff if the risk occurs.
Have you insured key persons in your business? If not, what stops you from securing this vital cover?
