Key man insurance is becoming increasingly popular with employers as a cost-effective way to protect...
Key man insurance is becoming increasingly popular with employers as a cost-effective way to protect their business.
The performance of a business can be significantly influenced by the important contributions, skills and business acumen brought to the business by 'key' individuals - those employees responsible for looking after areas of the business such as design, marketing, finance or legal aspects, or those with key business contacts, are particularly important. In addition, it is important for a company to protect against the loss of control of its shares on the death of any one of its major shareholders.
If these key individuals (or shareholders) die unexpectedly or are unable to work due to long-term illness, the effect on the business could be potentially crippling. Small businesses are particularly vulnerable where these key individuals may be their biggest asset.
Prudence is a virtue
Employers are able to manage this risk cheaply and effectively by taking out key man insurance to cover this eventuality. Insurance can be provided at various levels and will depend upon the nature of the business, its financial position and the financial impact of the insured event upon the business.
While the insurance payout cannot completely put the business back into the same position that it would have been in had it not been for the loss of the key individual, it can help the business to continue to run profitably by 'softening the blow' of the loss.
By way of example, the payout could be used for the following:
- the recruitment costs of finding a suitable replacement to the key individual;
- the costs of any reorganisation;
- the costs of additional staff training;
- the purchase of any shares from the deceased's estate; or
- a simple cash injection.
The level of payout is usually set in advance and estimated according to the potential financial loss to the business.
It is prudent to conduct a review of the overall business strategy and identify major risks that could impinge on future profitability. Appropriate cover can then be implemented - but this should only occur after taking professional advice as to the correct sums insured, the most suitable policies, and the tax implications of the premium and the possible claim.
By having systems and risk management strategies in place, employers should be able to negotiate better terms and lower premiums for their insurance policy.
It is easy to overlook this type of insurance. However, in light of the current economic climate and to mitigate any potential losses, employers should seriously consider taking out key man insurance if the success of the business - or its success in a particular location, as may be the case with expatriate workers - relies largely on certain individuals. Acting proactively can provide peace of mind for employers.
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From 1 April 2019
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