Choosing the right level of keyman insurance for your business


In many businesses, success can be reliant on the performance of just a few key members of staff.

Whether it’s top performing salespeople, key account managers or highly skilled engineers or product developers, these employees are usually the driving force that push the rest of the business forward.

Losing one of these employees to death or critical illness isn’t just a tragedy, it can have severe consequences that can put a business’ future at risk.

It can cause an immediate loss of revenue from lost sales or accounts.

Medium and longer-term it could mean lost business and higher expenses to replace an employee or internally train someone up to the same level.

Protecting a business from the loss of a key employee to death or critical illness is an essential responsibility for any business owner.

But what’s the best way to do it?

Keyman insurance is one of the most common – and effective – ways to protect businesses from the loss of a key worker.

It provides financial protection in the form of a payout in the event a covered employee dies or leaves the business due to illness.

It’s important when taking out keyman insurance that you choose the right level of financial protection.

Not taking out enough cover means a business remains open to financial problems in the event of an employee’s death.

But taking out too much cover means the business could face excessive premium payments that could just as easily put a financial strain on budgets.

There are a number of factors to think about when taking out keyman insurance, here business insurance specialist Rigby Financial discusses some of the main considerations you should keep in mind.

1.   The size of the business and the number of employees you want to cover

The first thing to think about is the size of the business and the number of employees you think you need to take protection out on.

Typically speaking, it’s easier to judge who you’ll need to take keyman insurance out for in a smaller business because it’s more obvious who the company is reliant on for its success.

For example in a small business you might only need to take protection out on the owners of the company as they’re more likely to be the success drivers.

In a larger company, it might be the top performing sales people, key account directors or the most skilled engineers who you need to cover in the event of a death.

2.   How much revenue does your ‘key person’ generate?

A key person isn’t always someone who is directly responsible for income generation (like engineers and product developers for example) but it’s highly likely you’ll want to take key person insurance out on your top salespeople or account handlers.

Understanding how much these employees contribute to revenue can help you figure out how much cover you should take out for any losses.

These could be direct losses in sales that a key person would have closed, or the loss of key accounts who stayed with your business because they had a good relationship with the employee.

Understanding the revenue tied to an individual employee can help you understand how much you’ll need to cover any potential losses in the immediate and long-term.

3.   Are there any outstanding debts linked to the employee?

This is typically related to high level executives or owners, but if the business or the employee has taken out a loan to pay for new equipment, office space or capital to fund growth, these debts could be liable for full repayment in the event the employee dies.

Without insurance in place, these costs could be left to the business to pay out of its reserves, or even the family members of the employee.

Keyman insurance can help ensure the finances are available to cover the costs of loan repayments without jeopardising any business or personal finances.

4.   How much will recruitment or training cost to replace the employee?

It can be tough to think about the prospect of replacing a key member of staff, but the fact is, it will have to happen so the business can continue to operate.

There are two main issues when it comes to the costs of replacing a key member of staff.

The first, is that it typically costs more in recruitment fees to hire senior executives or those with higher skill levels, as they usually need to be headhunted – rather than sending out a general job advert.

The second, is that if you plan to replace them internally, it could mean a lot of training and development fees to get an existing employee up to the same level, not to mention the time to properly embed them into their new role.

Either way, there are likely to be some high fees and costs involved with replacing the employee.

Keyman insurance provides the funds you need to cover these costs without taking funds or resources out of the business.

5.   What level of cover can the business afford?

While every business will want the highest level of cover available to protect them from the loss of a key employee to death or illness, this has to be balanced against the investment needed for the cover.

It might be the case that the business doesn’t have the resources to get the full level of cover it needs, or to be able to cover all the employees it wants.

If this is the case, the best thing to do is prioritise employees.

This means looking carefully at the business’ finances and understanding who in the business is responsible for revenue generation.

It could also involve a full customer review and understanding which employees hold the key relationships.

Or, you could review skill levels within the company and take out coverage on those with the highest levels of skill and experience, or those with niche skills that could be difficult or costly to replace.

The employees you identify on any of these lists are the ones you should prioritise for insurance cover.

6.   Will the business even continue in the event of an employee death?

This is highly dependent on the size of the company but you do need to consider whether the death of a key employee or person will result in the business folding.

It’s not likely to be an issue in a large organisation, but for a smaller business, where the death of an owner for example could result in the end of the company, it’s worth considering.

If the business is likely to fold as a result of a death, you’ll need enough keyman cover to pay off any outstanding debts owed by the business, as well as any fees associated with closing the company down.

If the plan is to pass the business over to another party (for example passing complete control over to a partner) the keyman cover should include any legal fees or other costs related to transferring the business to a new owner.

For larger businesses, it’s much more likely the key person insurance will need to cover lost revenue in the short-term, rather than the costs of closing or transferring the business.

Getting the right cover to protect a business’ future

Regardless of what keyman insurance is needed for it’s essential that any business planning to use it takes out the right level of cover to protect them from the loss of a key employee.

Talking to a broker can be one way to ensure you take out the right coverage.

Without the right level of keyman insurance, a business could find itself in financial difficulty from the loss of a key person that the company could struggle to survive.

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