Who should have Key Person Insurance?
Every successful company has a need for key person insurance no matter how big or small they are. Whether they are a large blue chip corporation, or indeed a sole trader. Key person insurance should be tailor made for each individual company. It comes in many forms and can be used to protect all kinds of companies. Every company has a need for key person insurance, it is just a case of identifying the areas of risk and covering them in an efficient way.
Companies can have several different set ups, for example. There can be a Limited company, a partnership, a sole trader, a corporation or even a large structured multinational company. All of these companies share a common interest, and that is they rely on key workers for profits within their business.
A good key person adviser should be able to highlight your areas of risk with in a two minute conversation and be able to recommend the correct cover. From here it is a case of budget and how close to the perfect cover can you get for your budget.
Below is some basic details of a few of the more common set ups and scenarios.
Limited company – 1 Director
There is a possibility of Relevant Life Insurance and also Key person insurance for a company with one director. Relevant Life will be explained in more depth if you click here. The key person or persons could be a top sales person, an employee who has a good relationship with key accounts, a manager who gets the most out of a team, an admin person who the company relies on. Basically anyone who by not being around would have a negative impact. Whoever the key person, there will be at least one who is crucial to maintaining profitability.
As a director or manager you have to decide what would be the impact of losing this key person, and what your options would be. If you plan for the worst case scenario then you know everything else should be ok.
If the key person were to be hit by a bus and never able to return to work, what would the company look to do? There are several options and each have an impact on the type and amount of cover. For example, if you were looking to bridge a period of lower profits, you would look to a lower amount of cover representing the loss. Or if it was to replace the lost profits and then replace the employee and accommodate a training programme, then the amount would be significantly more.
This is why it is important to have a clear understanding of what you want the cover to do for you and discuss it with a qualified adviser. There may be things you are missing or indeed things you are doubling up on.
Limited Company – More than 1 Director
The main difference when there is more than one director is the need for Shareholder Insurance. Where there is more than one director, you instantly run the risk of shares from a deceased director falling into the wrong hands. A typical scenario would be where there are 2 directors owning 50% of the shares each. If Director A was to die, his shares would be passed into his estate and more than likely end up with his wife, assuming he has one, if not children. The surviving director is now left with not only the difficulty of trying to keep the company going on his own and maintaining profits. But he has also inherited a director who has no knowledge of the business. The wife who now owns 50% of the company could do one of a few things. Firstly she could insist she become part of the company and start making decisions that she has no idea about and therefore having a detrimental effect on the company. Or, following the death of her
husband, she may need a lump sum of money to clear debts, pay funeral expenses, replace the loss of his income etc. All of these would mean she was in a bad place and would need money quickly. This could lead to her selling the shares at a below market rate, thus devaluing the surviving director share and over all affecting the value of the company as a whole. So now the surviving director is in a bit of a situation as he has all the day to day problems of being a man down, plus he loses a huge amount of value in his assets. This could all be avoided by a simple shareholder agreement and a shareholder protection policy, and isn’t that expensive considering what it can protect you against. Let’s take the same scenario as above but this time with the correct insurance in place and see how it would benefit. The company decide to take out a “Shareholder Agreement” with a “Shareholder Protection” policy in place. The agreement states
“On the death of a director, the surviving director has to purchase the deceased shares at a pre-agreed price”
Let’s assume this pre-agreed price is £250,000. The policy amount would be for a minimum of £250,000 and would be death cover only. If then director B dies, director A would purchase the shares via the agreement and would fund the purchase cost of £250,000 using the pay out from the shareholder protection. Now the surviving Director A has 100% of the shares and has no financial outlay what so ever. Additionally, the deceased director’s wife receives the £250,000 in settlement for the shares. This is a double benefit and means the wife/family is now financially stable and can grieve without having to worry about money, plus the company is in the right hands to continue.
So as you can see, Shareholder protection can not only benefit the surviving director and safe guard the company in the event of a sudden loss, it also helps the deceased directors family and can act as a safe guard to any director.
There will be more info and some examples of shareholder protection on the shareholder protection page.
Within any business there is always one or two certain people who are key to making the company tick. Even companies with a good product or service will often have one or two people whom they rely on massively for keeping the profits coming in. A key person could be anyone from the team manager to a top sales person. Maybe it’s your web page designer whose job it is to update products on the website.
When starting a business of course there are lots of important things to make sure you have in place. Arranging insurances is not the most exciting, but very important. Companies need to make sure all avenues are covered. Of course businesses will insure all their equipment and any machinery. Indemnity insurance is of course important to have in place. But many directors forget to insure what’s possibly the key to their success. The people within the company that run it.
To get quotes for key person insurance please fill in our form or give us a call and speak to an advisor.