Running a business in London is no easy task. For small business owners, there’s an overreliance on the founder. Whether starting as a solopreneur or founding a business with a few members of staff, the owner and operator is a key person in the company. Losing them would make it hard for the business to survive.
For businesses that need to continue beyond the life of the entrepreneur – perhaps because they have a family to support after they pass away due to an illness or a car accident – a safety net is required. This is something that will help the company survive and prosper even should the worst happen. For just this situation, Key Man (also called Key Person) Insurance was created.
What is key man/person insurance?
Key man insurance (aka per person insurance) provides coverage, usually to a limited company and sometimes to a sole trader, should the leading person in the business die unexpectedly. The insurance – like the policies offered through applescottinsurance.com – provide funds to help the business through a period of transition where the key person is either incapacitated or has died. There’s sometimes more than one key person in a business and they can each be insured as well.
The funds are intended to help manage the immediate business issues like the loss of the technical know-how, experience, and contacts. An insurance claim can provide money to pay for a replacement Managing Director to replace the job that the founder is no longer there to complete. The intention with the insurance is to provide a way for a business to continue as a going concern, so the employees are safer, and any family of the key person has a way to continue to enjoy an income from the business.
Who is the key person?
The key person doesn’t have to be the Managing Director. It can be an important person who is felt to be almost irreplaceable and certainly difficult to find a suitable alternative candidate for their position.
For instance, a Sales Director who’s particularly successful at opening up new avenues in broader markets would be sorely missed. Key person insurance covers them to allow the business some degree of protection from the loss of their productivity. Given that it can take six months to find someone comparable to fill their position, the insurance helps the business stay afloat during this time.
Digging into the specifics
This type of insurance may provide different protections depending on the insurance provider and their terms and conditions.
For instance, with critical illness cover, should the key person develop a critical illness that falls under an accepted illness category, then a lump sum payment may be payable under the policy. Similarly, with cover for life and critical illness, the key person has insured coverage for a critical illness if they become terminally ill or they, unfortunately, pass away. Again, a lump sum is usually how most claims are paid out under these circumstances.
There’s also an element of life insurance that comes with a key person policy. This folds into the other coverage, but it relates specifically to a provision to support the business, not one that supports the immediately family’s financial needs. Whether a separate life insurance policy is required for adults with a family is a different question that needs careful consideration.
Why the changing terms?
When this form of insurance was first issued, it was mostly for men who founded companies or who were key executives. Now, of course, that’s changed considerably with female-owned businesses popping up left and right along with important executives in small businesses increasingly being women. Therefore, the ‘key man insurance’ is being gradually renamed to ‘key person insurance’ as insurers adapt to the changing reality. The terms are interchangeable.
Other things business owners can do
One of the most important things to do as a business owner is to create a structure to make the most important people replaceable. This isn’t an idea that comes automatically or comfortably to most entrepreneurs who like to feel irreplaceable at times. However, if they have a significant other or children they’re responsible for, then it’s sensible to think beyond that.
Creating Standard Operating Procedures for important tasks and projects is useful for other employees in case there is a short-term period of illness or necessary absence. This applies equally to all positions; not just the most important ones. Having clear instructions prepared on how to perform important tasks within the business helps other people take over even when an absence unexpectedly becomes permanent.
Almost every business owner can benefit from key person insurance. While there are other types of insurance policies to protect against lawsuits and accidents in the workplace, covering the loss of someone or dealing with the possibility that they might become extremely ill is often overlooked. Don’t make the same mistake.