The benefits of Key Person Insurance

It doesn’t matter how large your company is: it’s important that the business has enough insurance to protect itself and the employees. One of the most popular types of insurance is Key Person Insurance, which is paid for by the business. Key Person Insurance is used to cover essential members of the company in case they unexpectedly pass away or become critically ill.

There are many benefits of Key Person Insurance as it safeguards the business against the sudden loss of a key member of staff. The insurance money can help operations continue running smoothly, minimise disruption to staff and maintain customer and investor confidence in the business.

Continue reading to find out about the Key Person Insurance benefits and how they can help your company. You can find out what Key Person Insurance covers, along with the advantages and disadvantages to consider.

What is Key Man Insurance?

Key person insurance is a type of business insurance that protects the company against financial losses due to the death or illness of a key member of staff. The insurance is specifically used to protect the company against the loss of directors, top executives, leading salespeople and other staff members who are integral parts of the company’s income and growth. The member of staff is usually considered a ‘key person’ if they have unique skills and knowledge that would be difficult to replace at short notice.

If the key person were to pass away or become critically ill, their absence could directly lead to lost profit for the company. Customers and contacts may also lose confidence in the company due to the loss of the key person, and the business may also face significant recruitment costs to replace the key person. The aim of Key Person Insurance is to offset these expenses and help maintain the standard running of the business.

Most Key Person Insurance covers companies should a key person die while employed at the company. However, some policies may also offer Critical Illness cover, which also offers protection should the key person become critically ill and be unable to work. This could be as a result of a stroke, cancer or other serious illness. In the majority of policies, the insurance offers cover if the key person is terminally ill with less than 12 months to live. Key Person Insurance with both Life Cover and Critical Illness Cover will have higher premiums than Life Cover alone.

Who does Key Person Insurance benefit?

Key Person Insurance benefits various areas of the business should a key member of staff pass away or become critically ill. The insurance policy helps ensure the company can continue operating smoothly, even without the key person.

The Key Person Insurance benefits the company by helping cover the cost of recruitment and training to replace the key person. This could include the cost of hiring a recruitment agency, interview costs and training programme expenses. The insurance money can also offset any lost revenue that’s a direct loss of the key person’s absence and the loss of their specialist knowledge and skills.

The benefits of Key Person Insurance can also help the business owners and shareholders. The insurance protects their investment by reducing the financial risk associated with the loss of a key member of staff and helping to maintain the company’s value. Key Person Insurance also helps make sure that the key person’s financial obligations, such as business loans, can still be met.

The roles of other staff members are given more stability thanks to Key Person Insurance. The cover helps prevents any layoffs or closures that might have occurred due to the loss of the key person. Lenders and investors are also more likely to work with the company if they can see the business is capable of managing risk.

What Benefits Does Key Man Insurance Offer for Businesses?

The benefits of key person insurance can help safeguard your company should you lose a key member of staff. Key Person Insurance can give your company much needed financial protection by helping to cover any lost revenue that is a direct result of the key person’s absence. The insurance money can also provide financial aid to prevent operational disruptions, and the cost of hiring or training a replacement if a key employee passes away.

The insurance money can help the business continue running through the transitional period and prevent any major loss of profits. This will help your business to retain customer and investor confidence, despite the loss of the key member of staff. Without the insurance, the resulting disruption caused by the loss of a key person could lead to operations halting, which could irreversibly damage the company’s relationship with customers, traders and investors.

Another of the Key Person Insurance benefits is the tax-deductible aspect of the insurance. You can find out more about the key man tax treatment to learn about the specific criteria that makes the Key Person Insurance premiums tax-deductible. The three main requirements for Key Person Insurance to become a tax-deductible benefit are as follows:

• The sole relationship is that of employer and employee
• The insurance is intended to meet the loss of profit resulting from the loss of services of the employee
• It is an annual or short-term insurance

It’s important to remember not all premiums are tax-deductible — you should check with HMRC if you’re unsure if your insurance cover qualifies.

What Losses Do Key Person Plans Cover?

There are many benefits of Key Person Insurance to help your company and staff through the struggle of losing a key member of staff. The insurance money can be used to prevent potential short-term and long-term company losses. The main Key Person Insurance benefits cover the following:

• Lost Revenue – Covers income the business might lose due to the absence of the key person. This could be because the key person was responsible for major client relationships, sales, or innovation within the company.
• Recruitment & Training Costs – Helps cover the expenses of hiring and training a suitable replacement, which can be a time-consuming and costly process.
• Business Loan Repayments – If the key person had personally guaranteed business loans or was essential to securing financing, the insurance payout can help pay off debts and avoid financial strain.
• Operational Disruptions – Supports the company in maintaining day-to-day operations despite the initial disruption.
• Reputational Damage – If a key person was the face of the business (such as a CEO or founder), their loss could impact the company’s reputation. The insurance payout helps fund marketing and strategic efforts to maintain confidence in your company’s brand.

If the insured key person were to pass away or become critically ill, the insurance company pays out a lump sum to the business. These funds can be used to help the business transition through this difficult period and keep operations running smoothly. This could be by covering lost revenue that’s directly linked to the absence of the key person. The key person may have had a specific set of skills and knowledge that the company can’t continue running without. Your company could also use the insurance money to cover recruitment and training costs to find a replacement for the key person. This could include the cost of hiring a recruitment agency, interviews and a specialist training programme.

The key person may have been directly responsible for loans or other financial obligations on behalf of the company. You can use the insurance funds to help cover the loan repayment costs to help maintain the company’s financial stability. This can also ensure no redundancies need to be made or other drastic decisions within the company to cope with the loss of the key person.

When a key person in the business passes away or is otherwise incapacitated, it’s important that the company continues running operations as normal. Key Person Insurance can help fund the company through the difficult period and maintain work as usual. This helps maintain supplier and customer confidence and prevents a loss of trade.

How Does Key Man Insurance Work?

You need to identify key persons in the company whose loss would significantly impact business operations. This could be the company’s director, top executive or a leading salesperson. The company may also be reliant on an employee who has a unique set of skills and knowledge that couldn’t be easily replaced. In some cases, the key person may be the public facing figure of the company and the main source of networking. Once you have identified all the key persons, they should be named on the insurance policies. Your company may have one or several key persons named: it all depends on the size of the business and the specific members of your team.

If the key member of staff passes away or becomes critically ill, the company can claim on the insurance. The typical pay from Key Person Insurance is three to five years of the employee’s salary, although the exact figure varies depending on the policy. These funds can help the company stay on track and minimise the disruption caused by the loss of the key member of staff.

What are the Disadvantages of Key Person Insurance?

While key person insurance provides valuable protection for businesses, there are some potential drawbacks to consider. Depending on the key person’s age, health, and role, premiums can be expensive, especially for small businesses with limited budgets. For example, an older key member of staff will likely have higher premiums than a younger member of staff, an employee who smokes would also have higher premiums as it increases their risk of health issues. Some employees may not be eligible for Key Person Insurance, usually if they have a high-risk role or dangerous hobbies.

Unlike other types of insurance, such as relevant life cover, the key employee or their family does not receive any financial benefit from the policy unless separate arrangements are made. The company is the policy beneficiary, and the insurance money is intended for business purposes.

The premiums for Key Person Insurance are typically non-refundable and there’s no payout if the insured key person retires or leaves the company. Depending on the policy, the payout may not fully compensate the loss of skills, leadership or relationships that the key person had. In addition, the insurance may not be tax-deductible, depending on whether it fits HMRC’s criteria or not.

Why Should my Business take out Key Person Insurance?

If your business relies on a few individuals for success, Key Person Insurance is a must-have. A key person policy provides financial support to help your business recover should a key member of staff pass away or become critically ill. The insurance money safeguards your business against disrupted operations and lost revenue and can help the company recruit and train a replacement.

Having Key Person in place demonstrates to investors and lenders that the business has a risk management plan in place, which can increase their confidence in your company’s stability. The insurance will also give everyone in your company peace of mind to focus on growth, as everyone will know the company is financially protected from the unexpected loss of a vital team member.

Here at My Key Man Insurance, we can help ensure your company is protected from the disruptions caused by the loss of a key member of staff. You can quickly get a quote from us and compare the best deals to find the right Key Person Insurance for your business needs. If you need any help with the application process, please contact us by phoning 02071128844 or emailing us at info@mykeymaninsurance.com.