Why every business should consider key person insurance

In the dynamic and often unpredictable world of business, the loss of a key employee can have devastating consequences. Whether it's the sudden departure of a founding partner, the unexpected illness of a top executive, or the untimely passing of a leading innovator, businesses face significant risks when crucial personnel are no longer able to contribute. This is where key person insurance comes into play.

As a business, you’ll be familiar with insuring your physical assets; your buildings, stock, and liabilities, but focusing on the human risk in your business is equally as important. By providing a financial cushion during difficult times due to the loss of a key person - this type of insurance can help to ensure business continuity, stabilise operations and potentially preserve the confidence of stakeholders.

In this article, we will delve into the critical role of key person insurance, explore its benefits, and explain why we think every business should consider it as part of their risk management strategy.

What is key person insurance?

Key person insurance is a strategic risk management tool designed to protect businesses from the financial fallout associated with losing an essential employee. A keyperson is an individual whose skill, knowledge, experience or leadership is crucial to the ongoing success of your business.

If a vital employee dies or suffers a serious illness, key person insurance can help to mitigate the potential risks to your business by providing a cash sum to help your business ride out the consequences.

Why is key person insurance so important?

Your key personnel help keep your business at the top of its game. However, if one of these key people became critically ill or passed away there may be concerns over business interruption.

• It may be uncomfortable to consider the worst happening to your close colleagues:
• How would your business cope if certain key people became critically ill or passed away?
• What knowledge, experience and expertise would be lost? What would be the effects?

Losing a critical member of your team could have serious impacts on your business, which might lead to:

• A fall in profits
• The loss of customers or contacts
• A business-critical skill gap, meaning you can’t continue trading

By covering costs such as hiring and training a replacement, compensating for lost revenue, and maintaining creditor and investor confidence, key person insurance ensures your business’ continuity and stability during turbulent times.

It allows you to focus on what’s important: looking after your employees during what will be an upsetting time for them, putting measures in place to minimise disruption to their roles and how they complete their tasks and allowing them to feel more secure and motivated to continue their work.

Who needs key person insurance?

Almost all businesses, from partnerships to multinational organisations, have people who are essential to their business’ ongoing success. This could be each member of a partnership - recognising that without the other their business cannot continue trading, or a global business - insuring against the loss of their CEO or Sales Director.

Here are a few types of businesses that could particularly benefit from taking out key person insurance:

• Small and Medium-Sized Enterprises (SMEs): SMEs often rely heavily on a few key individuals for their success. The loss of a key person can be particularly devastating for smaller companies where their contributions are critical
• Startups and partnerships: Founders and early-stage employees in startups or unique partnership arrangements often possess unique skills, knowledge, and relationships that are vital for the company's growth and survival.
• Businesses with specialised roles: Companies that depend on employees with specialised skills, such as lead developers, researchers, or technical experts, should consider key person insurance.
• Businesses with strong customer relationships: Employees who have established critical relationships with major clients or partners are indispensable. Losing them can strain these valuable connections.
• Professional services firms: Firms such as law firms, consulting firms, and medical practices often rely on the reputation and expertise of a few key professionals.

An example of how much key person insurance might cost:

Here is an example of what it could cost to insure an office-based employee, non-smoker with no medical or health issues for £250,000 of life insurance, over various periods:

Age	Plan term	Monthly premium*
35	30 years	£13.19
45	20 years	£21.15
55	15 years	£44.98

*Premiums are not guaranteed and are subject to change, with insurers individually underwriting all applications in order to offer personalised terms.

What a key person insurance claims example could look like:

When XYZ Tech Solutions lost its co-founder Emma Johnson, a key industry expert, to a severe illness, the financial and operational impact was substantial. Fortunately, the company had a £250,000 key person insurance policy on Emma, which provided immediate financial relief, covered recruitment and training costs for a replacement, and ensured operational continuity. 

This insurance payout preserved client trust, maintained employee morale, and reassured investors and creditors of the company's stability. Ultimately, key person insurance was instrumental in helping XYZ Tech Solutions navigate this challenging period and secure its future.