Key Person Insurance

Who Could Be A Key Person In Your Business?

A key person is not defined by seniority or job title alone. It is someone whose death or covered critical illness could cause a measurable financial loss or make it significantly harder for the business to operate. Depending on the business, this could include:

• A founder or director who leads the business, secures finance or holds important client and investor relationships.
• A salesperson who brings in a large amount of new work or manages some of your most valuable accounts.
• A specialist whose skills or technical knowledge would be difficult for the business to replace.
• An operational lead whose absence could delay delivery, production or regulatory responsibilities.
• A relationship holder who is someone trusted by major customers, suppliers or commercial partners.

A shareholder may be both a key person and an owner. In that situation, Key Person Insurance and Shareholder Protection can address different risks, so one policy should not automatically be treated as a substitute for the other.

What Can the Payout Help Your Business Manage

The financial effect of losing a key person will differ from one company to another. Depending on the business’s priorities, a payout could help it:

• Offset a period of reduced revenue or profit.
• Recruit, train or temporarily replace the person.
• Manage disruption while responsibilities and client relationships are transferred.
• Meet essential operating costs or financial commitments.
• A payout may ease the immediate pressure while the directors change their plans, reorganise responsibilities or explore further finance.

However, money cannot replace the individual’s experience, client relationships or influence. The policy alone will not keep the business running. The policy should sit alongside practical succession and continuity planning.

How Much Key Person Cover Might You Need?

There is no single calculation that is suitable for every business. Salary alone may not reflect the value of a key person’s work, and a standard profit multiple can miss important costs or dependencies. An assessment may consider:

• The profit or revenue reasonably attributable to the person.
• Customer contracts or commercial relationships that could be affected.
• Recruitment, training, handover and temporary staffing costs.
• How long the business may need to recover or replace the role.
• Outstanding borrowing and other essential financial commitments.
• Existing cash reserves, insurance and continuity arrangements.

The insurer may ask for accounts, management information or evidence supporting the amount requested, and it may limit the cover available. The calculation should therefore be treated as a reasoned working estimate, not a universal formula.

Where the financial assumptions are material, it can be useful for the business’s accountant to review them alongside the protection adviser.

What Affects The Cost?

The premium is based on the person being insured and the cover selected. Factors can include:

• The insured person’s age, health, medical history and smoking status.
• Their occupation, duties, travel and any hazardous activities.
• The amount of cover and the length of the policy.
• Whether critical illness cover is included.
• The insurer’s underwriting decision and any special terms offered.

The person’s financial value to the company helps determine how much cover may be appropriate; it does not create one standard price. A useful comparison should consider definitions, exclusions and underwriting terms as well as the monthly premium.