These significant staff often have a unique set of skills, and without them the business could risk facing huge losses. To mitigate these risk and avoid the business facing difficult scenarios, companies can take out what is known as key person insurance.
What is key person insurance, and does your business need it? Our latest blog will help you to understand why this type of insurance could be crucial for the future success of your company.
A key person is usually someone who is able to bring in high revenue to the business, or someone with unique knowledge or skills that are important for the running of the business itself. Without these people, the business would likely struggle.
For example, if you’re a POS business and you have a salesperson who brings in 80% of revenue, they would most likely be considered a key person.
If something unexpected happened to your key person and you lost them, it could have an impact on your income, paying wages or meeting other overhead costs.
The value of a key person can help you to determine how much key person insurance the business may need to take out. To begin with, think about the potential loss of profits should you lose your key employee; how much of your turnover is that key person responsible for? Then, consider how much it would cost the business to replace that person.
It can be a tricky task, but the team here at Caspian Insurance are on hand to offer a free, no-obligation quote for a key person insurance policy. We can help to understand the risks in your business and provide expert advice on the most suitable cover for your individual business.
You could create a sinking fund to help cover the loss of a key person within your business. To achieve this, calculate how much profit you may lose in a year, and how much it would cost to replace them. Is it realistic to set aside this amount of money every month without putting the business under significant financial strain?
The business should then begin setting money aside to cover that potential loss. This should be treated as an emergency fund, should you lose that key person. It is important to note here that you may have more than one key person in your business.
It is imperative to be as disciplined as possible in saving the money for this strategy to be successful. It also relies on there not being any losses before the sinking fund has enough in it.
You may also cover the loss of a key person using cash flow, but this carries a higher risk. This is because by the time you lose the key employee, your net income will likely be lower than normal. What is left will likely go towards mitigating the loss of your staff member.
The final option you have as a business is to arrange some form of commercial lending. Again, this comes with its own set of risks. If your business is struggling financially, you may face a challenge in accessing a loan. Furthermore, interest rates could be high which means you end up experiencing a bigger loss than just that of your key person.
Key person insurance can ease the hardship of having to raise the money to deal with the loss. Instead, the policy simply requires payment of the monthly premiums. Regardless of when your business experiences this terrible loss, you can rest assured that the business will be compensated.
This is different to sinking funds, where if you had not saved enough by the time they passed, you will be caught short.
Securing key person insurance may help to boost your credit standing. In some cases, when you apply for commercial lending, you may be required to have this type of cover in place.
Key person insurance can be crucial if your business is in a niche or very technical industry. Industries such as software development or biomedical means that some of your staff will likely be extremely knowledgeable and talented. To lose a member of staff like this can put your business at great risk.
Businesses most likely already have protection in place for things like equipment and inventory, but fail to take insurance out against the loss of its people. The loss of a key person can mark the start of financial problems for a business, and it can be one of the biggest risks to business growth.
By securing a key person insurance policy, you can feel more confident knowing your business is safeguarded from unforeseen circumstances