What is Key Person Insurance??
One question I keep getting asked is “What actually is Key Person Insurance?” otherwise incorrectly (not politically correct of course) referred to as Key Man Insurance.
Key person insurance is a life insurance policy that is taken out by a company on one of their employees, usually one of significant importance, where the death or incapacity of said individual can put the company at financial risk.
Key person insurance in the UK is relatively new, well, not new, it has just become more widespread in recent years. I recently heard that less than 5% of companies in the UK actually have any, but it is more like 25% in the USA.
In its simplest terms a “Life insurance” is contract by which a pre-agreed amount of money is paid to a selected beneficiary in the event that the life assured, or person covered, dies.
The “Key Person” in question depends on the type of company and what exactly they do, for example, in a sales based company, where the top sales person accounts for 50% of the total sales, could be deemed to be KEY to the success of the company. For some businesses, the entire sales team may be considered difficult to replace, especially if it is a specialist product. It may even relate to the contacts and connections associated with a particular employee.
Most lenders, especially in the current economic climate will require a business to effect Key Person cover on people they deem to be important in the decision as to whether they actually loan the company the money, and if that persons death would risk the repayment of that loan.
The proceeds of a “Key Person” Insurance may be used for a multitude of different reasons, they may be used:
i. To buy back shares in the company from a deceased partner / Directors beneficiaries.
ii. Pay back a business loan.
iii. Pay to train and source a replacement.
iv. To cover lost cashflow.
There are many reasons why a company would need or want Key Person / Key Man Insurance, and it is important that they understand the reasons and what their needs are.
If you think your business would benefit from a review, then please do not hesitate to contact us on 01482 658989 for a review on this or any other area.
Shane Beardsley
Managing Director / Independent Financial Adviser
Tags: company, key man, key person