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Insuring your business against the loss of key employees
Key man life insurance is simply life insurance covering a key employee within a business. This could be a salesman who has a wealth of contacts within their field, an IT technician with expert knowledge of the businesses systems, or one of the shareholders themselves who may be the driving force behind the company.
"How would your business be affected if a key employee died or became critically ill?"
Depending on their role, existing contracts may be put out for tender or lost altogether, payment terms could be affected, competitors could approach your important clients and banks could become nervous about providing additional funding or may even call in existing loans and overdraft facilities.
Making a lump sum available in the event of a key employee dying or becoming critically ill provides peace of mind for suppliers, bank managers, customers and staff alike, eases cash flow and allows a business to continue trading in what could otherwise be an extremely difficult period.
There is no hard and fast rule on how to calculate levels of key man life insurance, however, levels of cover must be appropriate and based upon the potential financial loss that could occur due to the death/critical illness of the key employee.
A variety of factors should also be accounted for, including the cost of recruitment, the cost of additional training, or potential short term recruitment of additional staff and the likely timeframe for any new employee to be fully able to return the business to its original position, prior to the loss of the key member of staff.
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"We recognised that a substantial part of our business, including detailed specialist knowledge of our systems and intellectual property, were invested in certain key personnel. If one of them died, the business would be completely exposed."
"It is a small business, just a couple of directors and a handful of other staff, but the loss of any key member of staff could be disastrous for the future success of the company"