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What is Keyman Insurance? What Does It Cover?

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What is Keyman Insurance?

Keyman Insurance protects your company against loss of profits and any other disruptions to business continuity resulting from the death or critical illness of a key employee. 

These are usually the founder(s), but could also include top sales people, web designers, financial officers or anyone else with a significant stake in the company’s success.

53% of small businesses stated they would fold within a year if a key person died or suffered a critical illness (Legal & General).

The Key Person Insurance offers a cash injection to help deal with the financial fallout from the loss of a key individual. They payout can be used to meet any sudden costs that arise from the loss, such as staff replacement costs or making up for lost revenue.

Victoria Slade Independent Protection Expert at Drewberry

The loss of a key individual’s ambition, talents, vision and drive could have a devastating financial impact on a company.

Covering that person’s life and health with a Key Person Insurance policy could offer the lifeline a company needs to stay in business should the worst happen.

Victoria Slade
Business Protection Expert at Drewberry

Why Key Person Cover is So Important for Small Companies…

According to the Office for National Statistics, 95.6% of companies registered in the UK in 2016 employed fewer than 10 people.

Most UK companies are small, and small companies are particularly vulnerable to the loss of one or two key members of staff.

Without them, there could be issues securing investment, maintaining lines of credit or even simply with keeping the company going.

Businesses of all sizes should consider Key Person Insurance if they have an individual or group of individuals that they could not do without, but small companies feel such losses particularly acutely.

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What Does Keyman Insurance cover?

The payout from a Key Man Insurance policy can be used however the business sees fit. One common use for payouts is meeting recruitment fees and any costs associated with training a replacement so that business can resume as quickly as possible after a key person’s departure.

The cash lump sum can also be used to address issues including:

  • Hiring and paying for emergency cover
  • Loss of profits
  • Meeting ongoing loan repayments
  • Having to repay an existing loan
  • Loss of faith in the business’ future from investors, lenders and suppliers
  • Difficulties in raising capital for new products or developments etc.
  • Loss of important business contacts
  • Absence of detailed knowledge about the business’ processes and systems
  • Loss of goodwill from customers.

In circumstances where there is only one key person and there is no business without them, the cash could even be used to wind down the company in an orderly fashion.

This could alleviate any concerns for the bereaved family relating to their deceased loved one’s business affairs. Winding down the business could include paying off creditors and perhaps providing severance pay to any staff.

Remember, unless the policy has been taken out to cover a business loan, HMRC generally taxes the payout from a Key Person policy as a trading receipt. As such, it’s important to gross up the sum insured by your company’s corporation tax rate to ensure it is large enough to cover your company’s needs.

Include Keyman Critical Illness Insurance

With Key Person Insurance, a company can insure just the life of a key individual or bundle the cover together with Critical Illness cover.

Given the risk of an individual developing a critical illness is significantly higher than them dying suddenly, it makes sense to insure both the life and health of a key individual.

By choosing to include Critical Illness Cover, the policy will pay out not just in the event of death, but also if the insured is diagnosed with a disease such as cancer, multiple sclerosis (MS) or Parkinson’s, or if they suffer a heart attack or stroke. This gives the insured individual the peace of mind that their company can cope without them so they can focus on recovery.

Robert Harvey Independent Protection Expert at Drewberry

We’re very familiar with the idea of insuring our own life to protect our family, but less used to insuring our own life to protect our business interests.

This is despite many entrepreneurs seeing the company they are building up as their baby! 

Robert Harvey
Independent Protection Expert at Drewberry

Extremely satisfied with the help and advice from Drew, since the beginning him understood what I was looking for and have the patience to help me out with all my questions and doubts. Didn’t tried to be push or annoying calling me all the time like so many did before. At the end we find the perfect medical policy for me and my daughter that covers everything that we need. I more than recommend them and if in the future I need something else for sure I will contact them again. Giving only 5 stars because I can’t give 6!!!!

Natasha Caversan Mucci
07/06/2019
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