Key Persons Insurance can cover the value to the firm of, for example, any of the following personnel
- Company owners
- Board members
- Product development heads
- R&D project leads
- IT directors
- Senior management staff
It’s a very broad church and in general it can be cover for anyone designated as ‘Key’ to the business. In other words; were they not able to carry out their duties and the business would suffer as a result of their absence through either incapacity or death then the firm can INSURE against the cost of replacing the resource.
With it being a difficult concept to discuss, the potential eventuality is often overlooked when protecting the business but in the worst-case scenario but, it may be seen as an imperative that will get the business through a difficult time.
What exactly is key person insurance?
If someone in the firm is considered to be important to the viability or planned growth of your organisation, they can be considered as a key person.
Perhaps their expert knowledge, individual skill, industry reputation or client/sales experience is key to your firm’s success?
Were you to lose such an important member of the firm’s team, it may take months or even years to find a suitable replacement for their position. In the meantime, the absence of the person in addition to any ground potentially gained by your competitors could have damaging financial implications.
Key Person Insurance covers this eventuality.
So, were this person or shareholder to either die or become critically ill (preventing them from ever returning to work), the insurance would help mitigate the potential financial loss of the firm.
The cost of Key Person Insurance will depend on the person you intend to insure. Just like any other life or critical illness policy, the cost will reflect their age and general health as well as their value to the business (in financial terms).
It’s worth noting that as long as the purpose of the policy is to replace the loss of income to the firm caused by the loss of a key person and you have a ‘term’ insurance policy that covers your employee ONLY whilst working for the company, the payments you make will be 100% tax deductible.
Were the policy called upon and it paid out, then calculations by the firm would determine just how it’s paid out.
To consider there is a range of benefits, some of which could be:
- Initial loss of profits
- Loans outstanding; perhaps financing of a project being run by the key person
- Director’s loan accounts
Undoubtedly, this is a difficult business decision given the subject matter but if called upon carries a great value.