Would your business survive if a key member of staff suddenly passed away?
It’s probably not something you want to think about. And although the personal tragedy would be first to mind, you have a responsibility to consider how this would then impact your business – and your remaining employees.
A sudden death or long-term absence could have a huge impact on your company’s success. You need to prepare for the worst-case scenario – and the best way to do that is to invest in a keyman insurance policy, such as that available at Rigby Financial.
Having a keyman insurance policy in place can help cover your business financially in the event a key member of staff dies or becomes too ill to carry on in the company.
Our independent financial advisors are extremely knowledgeable in this area, and here they answer some of your most frequently asked questions about keyman insurance.
What is keyman insurance?
Keyman insurance is a policy taken out by a business to insure their most valuable employees. It helps to think of it as life and critical illness cover for those who are crucial to your company’s success – whether that’s the CEO, your top sales guy, or someone with a specialist skill set.
If any of these key people were to suddenly die or contract a critical illness, a keyman insurance policy will protect your business against the financial repercussions. A lump sum is paid out directly to the business and this can be used to cover the cost of any profit losses, replacement staff, or loan repayments. It will keep you afloat during a difficult time and could be the difference between your survival or closure.
What does keyman insurance cover?
Primarily, a keyman insurance policy provides cover for death. If additional cover is selected at the outset then it could also pay-out for a critical illness or disability, which prevents your employee from working. In some cases, with the addition of an ‘income protection’ clause, it may even cover the cost of temporary staff – who are needed due to long-term sickness absence.
Who can be covered by a keyman insurance policy?
The definition of a ‘keyman’ is entirely dependent on your business and the employees you deem to fit into this criteria.
Typically, it’s reserved for owners or senior directors who contribute significantly to your business’ finances.
It’s also often used as a cover for top salespeople.
But it can cover employees with specialist skills, knowledgebase or responsibilities in the business who could be difficult to replace. For example, skilled engineers operating in a specific niche.
You can often determine who is a key person by asking:
- Are there any loans or overdrafts that depend on the key person?
- Would their absence affect business expansion plans or ongoing projects?
- Would the business be in danger of losing customer orders?
- Would it result in a loss of goodwill or hardening of suppliers’ credit terms?
- Would the business miss their administration or management contribution?
If you’re not clear on who should be identified as a key person in your business, why not chat things through with our knowledgeable team?
Call now on 01744 886077, email ifa@rigbyfinancial.co.uk or fill in our contact form and we’ll be in touch.
Do I need keyman insurance?
The answer to this question is simple. If you own a business then yes, ideally, you should have keyman insurance. Your staff are your greatest asset and you need to be sure that – if the worst happened and an important person was no longer around – your company could cope with the change.
It’s particularly important to invest in key man cover if you’re a relatively small or new company. This is when you’re most reliant on your staff and losing a key member could be the difference between failure or success.
You may also be asked to take out keyman insurance when applying for a business-related bank loan, as the pay-out can be used to cover the debt.
What level of keyman insurance do I need?
This will depend on several factors – including, most importantly, the key person’s yearly salary. As a general rule-of-thumb, this figure should be multiplied by 5 to calculate the absolute minimum level of protection that you need. For example, if a director earns £100,000 a year, their keyman insurance policy should ideally cover £500,000 (or more) in the event of death or critical illness.
You should also consider how much profit they create and how much it would cost to find their replacement. The bigger their contribution to the company, the more coverage you will need.
What happens to my keyman insurance if an employee leaves?
Employee retention is a much bigger challenge than it has been in the past.
In previous generations, people tended to stay in jobs for life. This is what made keyman insurance so popular – because you could pretty much guarantee your employee would stay with you for the length of the policy.
These days, while top executives may stay in the business longer (because they might have financial interests in the company), studies reveal that employees often stay in a job for just over four years – increasing the chances that a key person will leave with an active keyman insurance policy on them.
So, what can you do about it?
If you invest in a keyman insurance policy for an employee who subsequently leaves, you have a few options:
- You can stop paying the premiums and simply let the policy run out
- Transfer the policy to the keyman
If your keyman has moved on and you’d like to discuss your options in more detail, contact the team.
What are the main benefits of keyman insurance?
With less emphasis on a ‘job for life’ and an increased risk of employees moving on elsewhere, people can be left questioning if keyman insurance is worth the outlay.
But we’ll make this simple – it is!
And it’s advised you take out keyman insurance, whatever the size of your business.
Although we’ve already discussed the need for taking out a policy, it can help to have the benefits clearly laid out. So here we outline in more detail why having keyman insurance is so important for you and your business…
1. Cover the loss of a key person
A key person is anyone whose absence would seriously disrupt the progression of the business.
This is anyone from the founder to those with a specialist skill set in their department.
Without keyman insurance, your business could experience a range of financial problems.
Whether it’s the loss of revenue that person would have generated.
Or potentially the loss of relationships with future customers that person would have built.
Although it isn’t the easiest thing to think about, keyman insurance protects you from this turmoil in the event of a death or an illness so critical the key person can no longer work.
2. It can protect your finances in the short term
If losing a key person means lost profits, keyman insurance will help cover those costs until you’ve recovered.
It can also be used to pay for wages, replacement staff and even loan repayments owed by the business.
This will help keep your business afloat during a difficult period.
An example of this would be covering recruitment costs and paying off outstanding debt.
This limits your number of outgoings to save as much money as possible when the future of the business is unclear.
If you don’t have a keyman insurance policy in place, you could have scheduled payments but a lower overall income, causing financial issues.
3. Use keyman insurance to cover any outstanding debts
With keyman insurance, any overdrafts and loan repayments are covered.
It guarantees the repayment of loans (depending on the cover you choose) in the event of the death of a key person.
Having this in place will limit the wider impact on the business to prevent closure.
Any loans taken out to pay for machinery, for example, can be paid off using keyman insurance.
This makes sure business can carry on without additional outgoings.
4. Protect the future of the business
Going through something as difficult as the loss of a key employee could have a huge effect on your staff – particularly the uncertainty about the future.
The result of this is different for every business, so you’ll want to do what you can to make sure the future of the business is protected.
With keyman insurance taking care of the money side of things, employees can at least be more reassured that the business’ financial future is secure, and their own jobs aren’t immediately at risk.
5. Cover recruitment costs
You might not want to think about replacing someone under such circumstances, especially not immediately after, but the reality is you must continue doing business.
This involves finding someone new to be a part of that.
Keyman insurance will cover the cost of a new employee, as well as the process of advertising and interviewing candidates.
Is keyman insurance tax deductible?
If term assurance is selected, the premiums of keyman insurance are usually eligible for corporation tax relief. This is subject to the plan:
- being used to compensate for profit-loss following the loss of a key individual
- having a term of 5 years or less
- not being convertible
The local tax inspector will need to confirm the situation. If the policy is eligible for tax relief, any payment to the company (of the sum assured) would be taxed – as a trading receipt – at the usual rate of corporation tax. It’s important to take this into consideration from the outset and, in most cases, we recommend raising the sum assured by the keyman insurance policy to compensate for what you will lose in tax.
Some companies may require cover for longer than 5 years, in which case, a ‘whole of life’ plan is more appropriate. Alternatively, term assurance plans can also be provided on a five-year renewable basis – for all combinations of death, critical illness and total and permanent disability benefits. This allows the company to continue cover beyond five years, but still satisfies HMRC rules for corporation tax relief.
Where can I buy keyman insurance?
Most Financial Advisers now offer key person insurance. But when purchasing a new policy, it’s worth speaking to an Independent Financial Adviser (IFA) – such as Rigby Financial. Our experts can offer impartial advice on the best keyman insurance policy for you. They will identify the ‘key people’ in your company and select an appropriate level of cover to make sure you are fully protected.
How much does keyman insurance cost?
The cost of a keyman insurance policy varies depending on several factors, including the insurance provider, the ‘key’ people to be insured and the level of cover. Here at Rigby Financial, our goal is to make sure your business can look forward to a secure and profitable future – and we will do everything in our power to identify the best keyman policy for you, at the best possible price.
Find out how much coverage will cost and request a quote online today.
Preparing for the worst with keyman cover
No-one wants to think about the prospect of a key employee’s death in service or the potential of them becoming critically ill.
But it can happen.
When it does it’s important to remember the responsibility you have to your remaining employees.
They’re depending on the survival of the business for their own futures.
They have mortgages to pay and loan repayments to worry about.
Any financial uncertainty or worries about job losses could have a serious effect on them.
Keyman insurance simply helps provide some financial security to your business in the event something does happen to a key member of staff.
Get in touch with Rigby Financial today
If you would like to find out more about keyman insurance, or any of our other business continuity insurance policies, please feel free to get in touch. Either call us today on 01744 886077 to chat to an expert or send an email to ifa@rigbyfinancial.co.uk for further information.