Key man insurance is a type of business life cover designed to protect your business should an invaluable partner or employee become seriously ill or pass away. It gives the business financial stability and the means to continue trading with as little disruption as possible.
What is key man insurance?
Key man insurance protects your business in the event of one of its key people becoming unable to continue in their role. Also known as key person cover, key employee insurance and key worker insurance, it covers the life and health of the person or people the business relies on most.
L&G research shows that four out of 10 businesses would fold within a year should a key member of the team pass away or become terminally or critically ill. The business might experience a dramatic drop in sales without that person’s knowledge or contacts, whilst an increased workload might prove too much for remaining members of staff.
A key man insurance policy doesn’t specify how any money pay out is to be used, but examples include:
- Enabling the business to recruit and retrain replacement staff
- Repayment of existing loans
- Replacing knowledge of in-house systems and processes
- Protecting against loss of goodwill
- Protecting against loss of contacts and clients who, for example, might go to a competitor should a certain individual no longer be in your business
How does key man insurance work?
Key person insurance is usually taken out as a five or 10-year policy, depending on the nature of the person’s role. The business owns the policy and receives any payout, which is made in the form of a lump sum.
Key man cover can include life insurance only, or life insurance with terminal illness or critical illness cover. The sum insured is paid out on the death of the key person or on diagnosis of a terminal illness or a critical condition listed in the policy terms.
The level of cover and premiums are commonly calculated in one of three ways, based on multiples of the named person’s salary, multiples of the business’ profits or a formula based on the company’s turnover.
Does my business need key man cover?
Businesses of all sizes should consider how they would manage if a key partner or employee was no longer able to work.
Established businesses, such as those trading for 10 years or more, are perhaps more likely to have older people at the helm, with intricate knowledge of how the business works. Growing businesses may have loans or finance to help with expansion, and these would still need to be repaid should a key individual pass away or become ill.
New businesses within two years of starting up are more likely to have fewer people involved, and their loss might create a proportionately bigger gap than in a larger firm.
According to L&G, 50% of start-ups are sole traders, who are also eligible for key man insurance, payable to named beneficiaries, should their loss lead to the failure of the business.
How can I get the right key man insurance for my business?
We can help you compare quotes and find the right key worker insurance for your business, whatever its size. Our specialist team can help you search for the right price and cover combination to suits your needs.