At MGFP, we provide advice to many business owners, and in our experience, business protection is an area that is often overlooked. Whilst the importance of taking out insurance to protect business premises, vehicles and machinery is understood, business owners often fail to take out protection to cover the key personnel in their business.
It is, perhaps, not surprising, given that owners are busy involved in the day to day running of their business; however, failing to consider what would happen in the event of the death of a business owner, or key member of staff, can have very serious consequences. This is of particular importance for small and medium sized businesses, where the loss of a key individual can cause significant interruption to business.
Losing a key individual can present a number of issues in respect of business continuity, from recruiting a suitable replacement, to having sufficient income to cover existing business debts. It can also lead to the position where shareholders do not have access to the necessary funds to buy out the shares of a deceased shareholder. Research carried out by Legal & General found that 52% of businesses believe they would need to stop trading in less than a year, in the event of the death, or diagnosis of a critical illness, of a key individual.
This is why business owners should seriously consider taking out Key Person Cover for any individual whose loss could have a direct impact on the profits of the business. In addition to the business owners, this could be the leading salesperson, whose personal contacts are crucial to the success of the business, or the technical expert, whose knowledge is invaluable.
Key Person protection is a life insurance contract taken out by the business, on the life of the key member of the team. Premiums for the cover are paid for by the business, and the business is the owner of the policy. The policy is established on the basis that a valid claim would pay a lump sum directly to the business owners, which can be used to cover a number of different requirements, depending on the nature of the business.
Most Key Person policies are taken out to cover the death of a key individual during the policy term. However, covering the diagnosis of a critical illness should also be considered, given the increased potential for a key employee or business owner to be affected by serious illness during their lifetime, which could lead to that member of the team being away from work for many months whilst they recover.
The death or serious illness of a business owner, or other individual key to the business, could result in difficulties meeting existing loan and debt repayments. Holding adequate Key Person cover can help a business cover liabilities, such as bank debt or other finance and enable the business to continue trading. Furthermore, holding cover can also provide reassurance to lenders that adequate protection is in place to cover debts in the event of the worst case scenario.
Loss of a key individual is likely to hamper productivity and impact on company profits, and the smaller the company, the greater the potential for significant business disruption. By having Key Person cover in place, funds paid out on a valid claim can be used to cover the loss of revenue whilst the business recovers. It can also assist with the costs of replacing the key individual, or obtaining temporary cover whilst the recruitment process continues.
Once the decision has been reached to arrange cover, the business needs to decide on the level of cover required. Naturally, the cover should provide adequate compensation for the specific needs of the business, but at a premium that is affordable to the business.
The level of cover can be based on the amount of income generated by the key person, or by calculating the level of contribution that individual has made to the business earnings in previous years. Decisions also need to be reached about the duration of cover. For example, do you need to cover an individual until their retirement date, or will the value of an individual to the business diminish over time?
This is where independent advice can add value in assisting companies to arrange the right level of cover for their needs. It can also help companies to consider the tax implications of arranging cover.
We understand that business owners are often time poor, and focused on making their business a success. Business owners should, however, take the time to consider what impact the death of a key individual would have on the business. Likewise, if an individual is diagnosed with an illness that will mean that they are out of action for many months, understanding how existing workflow would be covered can be crucial to business continuity.
If you need help to assess the risks to your business, how best to protect your key staff, and obtain quotes from providers across the marketplace to provide a competitive quote, please speak to one of our experienced advisers here.
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