Key person insurance: a potential lifeline for your business?

Ensuring business as usual : Lucas Fettes Financial Planning

While the loss of a senior shareholder will clearly cause complications for the remaining shareholders, we all know that a good business cannot function without its employees. Whether it is due to critical illness or an unexpected death, the loss of a key employee can quickly destabilise day-to-day activities and compromise the business’s success.

Key person insurance could be a suitable contingency, which in certain conditions, can often benefit from tax relief – although this is a complicated area and one where advice is usually required.

How do you define a key person?

A key person is anybody who is essential to business operations. This could be a director or employee whose skill, knowledge and/or experience contributes significantly to your revenue. Alternatively, it may be that this person’s loss would affect your ability to meet financial commitments.

Why do you need key person cover?

The loss of a key person is a significant change. Key person insurance can provide your business with a lifeline in the form of a cash lump sum when it needs it most; money which can be used to repay loans, cover the costs of recruiting and training a replacement, or help to replace lost revenue temporarily.

Key person insurance can be taken out at any time but will largely depend on the needs of your business, how quickly it is growing and how reliant you are on key individuals.

How much cover is required?

To help estimate an appropriate level of key person insurance cover, you could consider one or more of the following:

1. A multiple of the key person’s earnings (e.g. 10 times salary).
2. A proportion of either gross or net profit, directly attributable to the key person.
3. The amount of an outstanding loan that would need to be repaid on the death of a key person.

Clearly, this will vary depending on the exact circumstances, and you should consider the effect of the loss of such a person on your business, including whether this would directly impact your profits, and what the cost of hiring a replacement might be.

If you have yet to put suitable cover in place, now may be the time to consider doing so. After all, key person insurance could be the lifeline your business needs.

Should your business want to understand the options available, please get in touch.

Lucas Fettes Financial Planning® is a registered trading name of Lucas Fettes & Partners (Financial Services) Limited and is authorised and regulated by the Financial Conduct Authority.

The personal insurance protection products discussed in this article are not savings or investment products and have no cash value unless a valid claim is made. The tax treatment of any policy may depend on your individual circumstances and may be subject to future change.