An insight into key person insurance

Host: Welcome to this edition of NFP insights. In today's short video, we've got Rich Hall from our private client's team with us to talk about key person insurance.

Richard Hall: Thank you, thanks for having me.

Host: How's it going Rich?

Richard Hall: Really good thanks, yeah not bad at all.

Host: Busy?

Richard Hall: Yeah, busy start to the year, as always but yeah got some interesting cases that we're working so it's all good stuff.

Host: So Rich before we start can you just gives us a bit of a 30-second intro to who you are and what you do within the business?

Richard Hall: Absolutely yeah so as you said, I work in the Private Client team of NFP. I guess you might think of me as being a financial advisor typical sort of IFA. Predominantly my job is to manage relationships for private clients within the firm. We deliver a lot of investment advice pension planning tax advice that kind of thing, I've got my portfolio of clients who I look after.

But more and more now we are engaging with the individuals of the businesses that we work for at sort of corporate level as well, so yeah I guess hence why we're here talking about key person insurance it's looking at the ability to advise people on individual solutions, not just group solutions. So there's quite a bit of crossover in terms of private client work and corporate work for the key individuals within businesses as well, it keeps me busy.

Host: Thanks for that Rich, going straight in - key person insurance - What is it? 

Richard Hall: Okay, I'll do my best I'll do my best.

So I think you kind of hit the nail on the head a little bit at the start which is kind of about businesses ensuring their most valuable assets. So typically we talk to businesses about their most valuable assets being the people and you know it's the people that drive success and drive businesses' success.

Key person insurance is you know it is backed by an insurance product but it's a way of businesses identifying who the key drivers of success are within their businesses and making sure that you know within the realms of what we can control that there are some insurance solutions that could kick in and provide financial stability, financial resource, should one of those key individuals be unable to perform their role within the business, you know there's a kind of a knock-on effect.

So I think one of the phrases I use is it's helping businesses ensure against the human risk in their business, so a lot of our clients and a lot of businesses will be ensuring their assets, ensuring their buildings, they'll be taking out liability insurances but this is specifically allowing a business to look and drill down on the key individuals, the people within their businesses who are making their businesses successful and thinking about those kind of scenarios where that individual cannot actually perform that role.

Host: When you say 'they can't perform their the role', are we talking about death and other critical illnesses? What kind of serious illnesses are we talking about?

Richard Hall: I mean death's pretty black and white and it's a horrible thing to think about and it, you know but ultimately we all know about life insurance it's a core benefit to a lot of people both in our personal lives and at work. So that so the death piece if you like is pretty black and white. But when it comes to an illness that's stopping someone carrying out their duty. That could be that someone is diagnosed with a critical illness you know cancer, heart attack, stroke and one would hope temporarily it might keep them if they are unlucky enough to be diagnosed and to suffer that kind of illness, temporarily it will keep them away from work during a period of recovery.

So there are critical illness insurance policies which pay out a lump sum typically, in the event of someone being diagnosed with that kind of critical illness. I don't want to get too jargon in here because the industry is complicated. So there's an insurance solution that can pay out on successful or unsuccessful diagnosis whichever way you want to look at it.

The other type of insurance product that we use for key person insurance solutions is, in our industry it's referred to as income protection, but what that does is, it pays the business a regular amount of money in the event of a key individual not being able to attend work. But the trigger of the payout is not because they've been diagnosed with a specific illness, the trigger for the payout is just they're just not well enough to come to work after a period of say 30 or 60 days. Those types of policies I think are really really important probably more important than typical critical illness policies that only pay out, you know over a sort of maybe 15 or so specific illnesses or diagnoses. An income protection policy, the key thing is that they're not well enough to come to work at the moment and that might be through mental health, it could be through exhaustion, it could be that they've had an accident outside of work and I think now you know we're more aware of the pressures on key individuals on executives within businesses. So if you've got a policy that could generate some well-needed capital inflows and revenue inflows to a business, when someone is too unwell to come to work you know that they really would get a lot of traction with that at the moment and a lot of people are really keen on looking at those.

Host: What kind of businesses is key person insurance aimed at? Is it the whole spectrum, from your large corporates down to say your manufacturing client that I know was surrounded by here on this technology park?

Richard Hall: It's a good question actually, we've dealt with lots of really interesting businesses over the last two years, where we've been sort of proactively talking about this. I've written key person insurance plans for, I'm just trying to give a couple of examples, some pretty big financial business asset management businesses in London where they've got portfolio managers who are running big books of investment business for them. They've got a unique skill set they've got experience, they've got relationships with their investors and if that individual was not there to run that portfolio and to want to manage those relationships then they're looking at some fairly chunky levels of cover actually so you know multiple millions of insurance.

But then like you say on the other end of this spectrum if you like, we've got small partnership businesses where you know each party of a partnership brings certain skills to the table in terms of making the business run successfully. So you might have a partnership arrangement, not even a limited company where they are looking at ensuring themselves because they can see the risks within the business if one of them wasn't there to carry out their roles and their duties.

So yeah I mean it's a bit of a cliche isn't, it can be across the whole spectrum, so we will help and have discussions with businesses, small partnerships, small limited companies, one or two directors right up to your really big businesses where they're ensuring key individuals CEOs, CFOs, you know some senior Executives as well.

Host: How is key person insurance costed? How do they work out the costs? What are the kind of elements to put a cost and a quote together for some of our clients who might not have ever had one before?

Richard Hall: Good question and I think a lot of our clients who might be watching this video, existing clients and potential new relationships as well. Might be used to talking to us about benefits on a scheme basis.

But this is very different to that so when we write this kind of business and we help people set these solutions up, it's done on an individual basis so these are standalone individual policies, so there's no cross-subsidy there's no averaging out of risk across schemes, we haven't got this sort of you know the sort of balancing there, so we typically help people with the application process we can give them indicative costs up front and the indicative costs would be what's the market offering this insurance for that individual based on the amount of insurance you're looking for, whether it's straight life insurance or whether it's a policy that covers that kind of illness scenarios as well. How old is the individual that you're looking at insuring? so obviously typically the insurance gets a lot more expensive when the individual is over 50 years old. What are the existing health conditions or status of the individual so are they a smoker? is there any obvious sort of markers that they've got sort of poor health at that time and then really yeah. So really it's about the amount of insurance that you're looking at taking out and for how long.

So if you're insuring a 50 year old who's a key individual you might say: Well they're probably not going to work past 65/67, you might look at an insurance policy for say a 15-year period or a 20-year period knowing that you can cancel it. But really age of the individual, length of the cover and any sort of clear indicators that person might have a sort of higher cost of insurance because of their medical situation.

Host: Are you helping our clients or prospects, identify who those key individuals are within the businesses or do typically people come to you and say there's a person that we need to covering?

Richard Hall: I find it difficult sometimes with the latter, because actually if someone comes to us with a predetermined idea of a level of insurance or the people that they need to cover. They might not be looking at it through the same eyes that we would so actually it's far more meaningful for us to be able to get in early with a company and have really open dialogue with them about you know who are the people within your business, you think that the business is at risk in this way, but as with a fresh pair of eyes we might identify that there might be other risks they're not thinking of, or they might be in some instances looking at over insuring an individual and then when we drill down and look at things like you know the level of profitability that might be attributable to that individual you know we can really engage with people.

So I think the earlier the better and I enjoy that you know it makes my job far more interesting far more rewarding thing that we're actually opening up, people's eyes to sort of risk that they didn't appreciate.

Host: It's more of a consultative approach?

Richard Hall: Yeah if it's done right it should be and I think our industry is sometimes guilty of you know just going ahead with a level of cover you know, with a view that any level of cover is better than no cover. But I think certainly we would prefer to drill down a little bit more and identify what the real risks are for them is.

Host: Are there any costs involved in that initial kind of scope in consultative work for you to go in there and identify who these people are and look at everything from a kind of bird's eye perspective?

Richard Hall: No, we listen, I mean it might be an obvious thing to say but we'd be very happy to just agree some initial discussions with clients. If people are watching have got existing relationships with us, if they've got existing relationship managers have a chat with them, see if we can set up an initial call, an initial meeting. Just to really see if we can add value, if it doesn't come to anything then it doesn't come to anything. But if someone is arranging that meeting they're probably already aware that there might be some some risk in the business so yeah so no initial cost.

Host: It's better to know than something happens and then identify it isn't it I suppose.

Yeah and hopefully you know it's listen this is a discussion around insurance, it's around contingency planning, it's about identifying risks and ultimately we're talking about mortality and some fairly unpleasant topics. But we try and make it as pain-free as possible and you know and it's not exactly an exciting topic you know but hey it's got you know it's got to be addressed really hasn't it.

Yeah fantastic.

Host: Well I think that's it Rich, thanks for coming.

Richard Hall: No, thanks for the chat yeah and hopefully that will you know even if it just sort of provokes some thought for some of our some of our clients and getting thinking about this is a key area within their businesses.

Host: Thanks for coming and speaking to us today about key person Insurance Rich. I hope you enjoyed the video and I hope you found it useful if you do have any questions about this speak to your NFP consultant or visit our website at nfp.co.uk thank you very much.