Key Man Insurance: A Definitive Guide to Key Person Insurance

Learn how you can protect your business from the effects of suddenly losing a key member of your staff with key person insurance cover
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Introduction to Key Person Insurance

Research shows that 54% of small business owners don’t have adequate insurance in place to protect their company against the sudden loss of a key employee; 20% of company owners didn’t even know key person insurance was a thing you could get.

And yet, according to statistics, 46% of UK businesses would be forced to cease trading immediately if a key person died or was unable to continue working through illness or injury.

We’ve written this guide to explain what key person insurance is, how it works and where you can get it to save you a whole heap of grief, should the worst happen.

Read on for a full debrief or click a link to jump ahead:

What is key man insurance?

Key man insurance (also known as key person insurance or key person protection) is an insurance policy a business can take out to protect itself against financial loss due to a key person in their business dying or being diagnosed with a critical illness.

Key man cover is term insurance and will pay out a cash lump sum if the named key person dies or becomes critically ill within the term of the policy.

How do you define someone as a key person?

A key person would be defined as someone who plays a vital role in the financial success of a company. It may be a founder or the person who sets the business strategy, or a top salesman responsible for bringing in profitable business. It might even be your technology guru who knows things no-one else in the company understands.

How does key person insurance work?

Key person insurance is either a life insurance or life insurance and critical illness cover policy which a business takes out to protect the life of a key employee within their company.

Owned for, and paid by the employer, any claim made against the policy will be paid out to the employer.

Broken down, it works like this:

  1. The company takes out life insurance or life and critical illness insurance on the key employee
  2. The company pays for the premiums and is the beneficiary of the insurance policy in the event of a claim being made
  3. If the insured employee dies within the term of the policy (or is diagnosed with a critical illness if this is also insured), the company will receive the pay out of the sum the employee was insured for

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What is the purpose of this kind of life insurance?

Key man cover is designed to protect a business that may be reliant on one, two or several key employees. With sufficient protection on key staff, a company will have the money to fund sick pay and recruiting new staff, and have funds available to protect against any wider impact the loss of an employee may have on the business.

The death of a key person, particularly in a small company, can cause catastrophic consequences for a business. Key man insurance is designed to help the company survive the loss of any person who is key to making the business work.

The proceeds of a key person insurance policy can be used to cover expenses incurred by the loss of the key employee until it can find a suitable replacement candidate.

In the absolute worst case scenario the cash can be used to pay off debts, distribute funds to investors and close the company down. In some circumstances, although it’s brutal, key person insurance could protect a small company against bankruptcy.

What does key man insurance cover?

You can get key man policies which cover life insurance only or choose a policy which covers both life and critical illness.

The cover is taken out to cover a specific term length, normally over 5- or 10-years. The premiums are generally guaranteed and often policies can be cancelled at any time with no penalty.

Benefits of key person cover

The primary benefit of key person cover is the peace of mind it can bring. Should anything happen to you, or the key employees of your company, the effect on the business will be significantly lessened due to the financial cushion provided by adequate key man insurance.

If you take out a business loan, the bank may require you to take out key man cover to protect the business loan. This provides the lender reassurance that the loan will be repaid should the person, or people, most crucial to the success of the company suddenly no longer be around.

Some policies also allow you to add an option to protect any loss in profits or the costs you will incur in replacing a lost employee.

Who needs it?

Small businesses are far more likely to have one or two significantly important people who the business relies on to succeed. Key man insurance is often overlooked by small businesses who tend to need it most.

For example, small businesses are more likely to have an involved founder, without whom ideas and crucial leadership would be lost. The loss of such a person could damage the ethos of a young business which may not have the resilience to sustain the blow, without a financial boost to help cushion the way to safe, profitable ground.

Key man insurance provides financial assistance to get a business through a period of uncertainty in the aftermath of unexpectedly losing a key member of staff. It may only be money, but that money could ensure your business can continue to operate following the loss of an important member of the team.

Key people inside a business might include:

  • The founder: you, or the person who devised the business and got things off the ground in the first place
  • Office manager: crucial in running the day-to-day operations
  • Technology guru: if you rely on a website to drive sales to your business, without your developer your business could lose its main route to profitable business opportunities
  • Top salesperson: if there’s one person the business relies on to bring the business through the door and make it stick, this person is key to the profits of the business

Who is the beneficiary for key man life insurance?

The company is the beneficiary of a key man insurance policy. The company takes key person insurance out on the life of a key employee of the business.

The company pays the premiums and, if a claim is made inside the term of the policy, the company will get either a lump sum payment or a regular monthly sum, as set out in the terms of the insurance policy agreement.

Who are the main providers of this kind of policy?

Key man insurance is sold by all the major insurance providers, but the main players are Aviva, Legal and General and Vitality. With so many providers offering key man policies, it’s a good idea to shop around to ensure you’re getting the right level of cover for the best available price.

The experts we work with are independent insurance brokers with whole-of-market access. They will be able to compare the cost of cover from insurers like Aviva against premiums from other, less well-known insurers to ensure you get the best available deal.

Speak to an expert

Call 0808 189 0463 or make a quick online enquiry for a free, no-obligation chat. We’ll match you with one of the independent insurance experts we work with who will be happy to find you the most competitive key man insurance cover in the UK.

They have the tools, knowledge and experience to make sure you get the right cover for the best available price. Get in touch and let them save you a heap of time, hassle and money today.

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