How Does Key Person Insurance Work?

In every business, there are always key people that make a big contribution to its success. If a key individual was to pass away, it could have a serious impact on the financial health of the company. By taking out key person insurance, the business can protect itself from a devasting event.

Many businesses depend on a few individuals to help drive business growth and success, especially in small and medium sized companies. While it is not a legal requirement to protect the business from a key person passing away, it is essential if you want to ensure the succession of the business.

Taking out a key person Insurance policy

Key person insurance is a form of life insurance taken out by the business for its employees. The business owns the policy, pays the premiums and will receive the pay-out if there is a successful claim.

This type of insurance is designed to protect the company against losing key people that it could not function without. If you were to lose someone who is critical to the business, what impact would this have?

Key person insurance is designed so the business is able to insure itself against the financial losses that may occur if a significant member of the team was to pass away.

Who is defined as a key person?

You might think a key person within a business is the owner or a senior member of the team, and while this is true, it is not limited to these roles. A key person could include any individual who is hard to replace; this could be something with unique skills, specific knowledge or strong relationships.

These kind of qualities can make someone crucial to a business being able to operate at its full potential. Without them, the business could suffer in more ways than one.

How does key person insurance help?

If a key person was to pass away or be diagnosed with a terminal illness, a key person insurance policy can provide a much-needed cash injection to support the business. This type of cover may help the business to provide a continuity plan in the instance of losing a key member of the team.

The pay-out from key person insurance may provide essential funds so that the business can continue as normal as possible. This financial support can help the business in a number of ways, depending on the role the key person had.

The pay-out may even provide a regular income for the key person, who may be unable to work due to a prolonged illness or injury.

The level of cover for key person insurance is often determined based on how that individual contributes towards the overall profit of the company. You should consider factors like multiples of profit and loan security, in case any debts have been left behind and now need to be paid off.

To learn more about this type of business insurance and how it could benefit you and your business, contact us today for specialist advice and support.