What is Keyman/person insurance (and why you need it)
Keyman insurance is designed to protect the continuity of a business if someone in an important or ‘key’ position were suddenly not around.
Many businesses have one or two people who are the driving force behind the entire enterprise.
Often the founder and perhaps one or two directors form the core executive team of a business and removing one of them from the workplace would cause significant disruption to the firm.
How does keyman insurance work?
The principle is simple, the business insures against things that may cause the key person to be absent from the business.
The person concerned must be crucial to the success of the business and their absence must cause financial harm to the company.
The obvious example is that of the death of the person concerned and, in this case, a simple life insurance policy would be used.
However, as we have seen through the Covid crisis, people can be laid low by an easily transmitted virus that isn’t fatal but causes them to be unavailable to the company for long periods.
Accidents are also a risk and although we never want it to happen, we understand that people are injured and killed in accidents every day of the week.
For a busy company, accident and critical illness cover will provide money to replace the skills of the key person whilst they recover.
The business pays the premiums and should the worst occur, the insurance company pays the sums insured directly to the firm itself.
Why you need keyman insurance
In recent research by Legal and General https://www.legalandgeneral.com/files/library/protection/sales-aid/bp-state-of-the-nations-smes.pdf 63% of businesses said that the death of an owner would have a big impact on the company but 40% of them had no contingency plan for if that happened.
Imagine what would happen to your company if a key member of your team died or suffered a debilitating illness – what would you do?
Many companies can bring in skills from outside on a temporary basis to cover absence or the recruiting of a new executive but these can be expensive and if the business is already paying sick pay to the employee who is unwell then it can be a double cost.
Keyman insurance provides you with extra cash to bring in the much-needed resources.
For very small companies, where the keyman is the owner and manager there may well be significant doubt about whether the business would be able to continue in the case of their absence.
A keyman insurance payout would help tide the business over whilst other employees get up to speed or until the company is sold.
With many SMEs providing the only income for a family, the need for protection is clearly incredibly important as death or illness could leave the business unable to trade and make it unsaleable.
Although we have looked at founders and owners it is important to also think about the skill base within the company.
Imagine a software company that has an exceptionally talented coder who is the pivotal member of a project team. The business has spent a large amount of money on developing a new product and the coder’s skills are vital.
What would they do with the project if the coder was unable to work?
If your company is making financial commitments such as taking out large loans or contracting to provide good or services you will often be required to take out keyman insurance to either guarantee the loan or provide for some business continuity.
How much keyman insurance should you get?
The amount of keyman insurance you should buy depends on their value to the business.
As a result, this really is a ‘piece of string’ question.
There are two main methods of deciding how much cover you need.
The first is to decide how much profit the person concerned is responsible for.
As an example, imagine a business that makes a net profit of £100,000 per year and the person concerned is responsible for around 10% of that.
A sensible approach would be to insure for five times the value of the net profit in question, so in our example, we would look for cover of £50,000.
The other option is to look at how much it would cost to replace the key person.
You would need to think about bringing in temporary cover, recruitment fees, training and onboarding costs and then a reduction in effectiveness until they were fully up to speed. We’d suggest adding in a fair amount of fat for unforeseen issues such as being unable to recruit quickly.
Naturally the more you insure for the more the insurance will cost but in any eventuality, it will be a small price to pay for protecting your business.
Where can you get help with keyman insurance?
It’s a complicated situation and every company is different.
That’s why we would always strongly advise bringing in experienced help when you are looking at keyman insurance.
Our financial coaches can give you the information you need to allow you to make the right choice for your business.
Call now and let’s talk over the options for you and your business.