Protecting your company from the loss of key employees with key person cover is an important element of business protection. But what are key employees and why is it so important to have key person insurance? Here’s everything you need to know…
Who or What Are Key Employees?
Most companies, large or small, have one or more individuals in their employment who are of special value and importance to the smooth running, profitability and future growth of their business.
These individuals may be of such great importance to a business because they have:
- Special leadership, specialised or technical skills
- Unrivalled experience and know-how in a specific aspect of the business/its operation
- Outstanding talents unique to them
Some people are of importance to businesses because they have commercial debts (business liabilities) secured against them (I.e. they are guarantors for a company’s commercial mortgages, asset finance, development loans and/or overdraft facilities).
As such, key personnel could, for example, consist of:
- Company owners, shareholders or partners
- Directors, managers or technical experts
- Designers, marketing experts or sales executives
- Any other employees with unique experience, skills or talents
Whoever your company’s key staff members are and whatever the reason for their importance to your business may be, losing such a person through an unexpected death or due to a critical illness diagnosis could have a significant detrimental effect on your business’ productivity, profitability and future financial security.
Immediate and Long-Term Effects of Losing a Key Employee
So, how can the loss of a key person affect your business? Depending on the specific individual’s specific ‘qualities’, his or her death or inability to continue working for you due to critical illness could result in virtually immediate loss of:
- Productivity and consequently profitability
- Critical business contacts that were associated specifically with this person
- Contracts this person developed and maintained
- Customers’ and/or suppliers’ goodwill and trust/confidence in the business
If the deceased key person was a business liability guarantor, relevant outstanding debts may also have to be immediately paid off in full.
Then, of course there is the cost of advertising for, recruiting and training a suitable temporary or permanent replacement for this invaluable individual.
Key Person Cover
Often also known as key man insurance, key person insurance cover mitigates the effects of losing a key staff member by providing the company with a lump sum in the event of an insured employee’s death or (if relevant cover is included) critical illness.
The company can then use this pay-out to:
- Pay off outstanding business liabilities secured against this individual,
- Cover the cost of recruiting/training replacement employees and/or
- Mitigate potential financial losses due to loss of productivity, contacts, contracts, etc.
- Continue to pay salaries
Naturally, it is important to:
- Set a policy’s cover level at the right amount to ensure adequate cover is provided
- Determine which individuals should be covered and which optional extras (i.e. critical illness cover) to include
- Ensure premiums are affordable for the company
Spectrum FA can help you with all of this. Discover how by calling us on 01279 315 013 now.