Next man up is a term often used in sports when key personnel go down, and it would be nice to think that is the way things work in the business world as well.
Unfortunately, there are times when it is impossible for someone else to fill the shoes of a key person in a business. For this reason, key person insurance was created.
If something unexpected were to occur to a key person of your business, such as a death or critical illness, the business now has options to help it remain afloat while a replacement is found. This insurance can often be the difference in the company being able to stay in business or having to close its doors.
What Is Key Person Insurance?
Companies have numerous options when it comes to key person insurance. There are policies designed to specifically cover the illness or death of a key staff member. In addition, there are also policies to cover the same situations for key stockholders of the company. In many cases, these individuals are key decision-makers and the loss would affect the company much in the same way as an individual involved in the daily operations.
Because an absence such as this will likely cause a loss of business, structural reorganisation, and possibly training of new personnel, companies can use the funds to cover these costs. In addition, there are also sometimes financial ramifications, which an insurance benefit payout can help cover.
Some of the riders available are for accidental injury or death as well as the key person being out of work for a prolonged period of time. However, please note, being named as a key person does not exclude that person or their family from being able to secure their own life insurance, critical care, or loss of income insurance.
In most cases, another key individual of the organisation will have to sign for the policy. In other words, insurance companies will not allow just anyone to take out a key person insurance policy on another individual. In addition, they will likely have to prove why this person is considered “key” to the organisation.
All businesses with employees are eligible for this type of coverage. The policy can be structured as a trust or as an asset to the company. Please note that England and Wales do not consider partnerships as a separate legal entity. For more clarification on this or to find out if your situation is eligible for this type of coverage, please contact one of our insurance specialists for more information.
Choosing the Right Key Person Insurance Policy
Just how will the loss of a specific individual affect the overall well-being of the company? This is a question that must be asked when considering a key person insurance cover policy. The answer to this will take some serious time and consideration. Because we know figuring this out can be difficult and involved, our team of insurance experts is here to help you if needed.
Some considerations for the level of cover are:
• Expected turnover due to loss of personnel
• Recruiting for new staff
• Training of new staff
• Expected loss of business
• Yearly income of covered
• Bonuses for covered
• Yearly profit
Examples of individuals likely to be covered by key person insurance:
• Majority shareholders
Generally, the overall policy will be valued at five to ten times the yearly valuation of the key person being covered. Again, arriving at the final level of cover can be quite complicated, so we recommend speaking to a Claybrooke insurance specialist when you are exploring the coverage options.
Are There Tax Implications for Key Person Cover?
There are tax regulations in place regarding key person cover and how it is treated in regard to being taxable or not. For instance, death would be considered a chargeable event, whereas a prolonged injury would not fall into that classification. A chargeable event is subject to taxes.
Premiums are sometimes deductible, but the final decision is ultimately decided by local tax laws. For more information, consider contacting your local tax inspector for verification as to what is and is not tax-deductible for this type of coverage.
How Does a Key Person Insurance Policy Work?
In essence, a key person insurance policy works much the same way as a life insurance or critical illness policy works. A company will purchase a policy naming an individual or individuals covered. If the named person(s) in the policy is to become critically ill or injured (depending upon the final type of coverage and riders secured) the company will serve as the beneficiary for payment.
The benefit payout enables the company to cover operational costs or the costs of training a replacement. In many cases, the loss of the individual can affect business relationships with customers, so it can also be used to cover loss of profits during this period.
In some cases, the loss of a single individual can cause a company to go bankrupt or force mass layoffs, resulting in severance payouts for employees. Key person cover can help alleviate these costs and protect the company from going out of business. Paying a small monthly premium is much more attractive than watching the business literally collapse because of the illness or death of a specific individual.
Being prepared for anything is an essential part of business, and key person cover is part of that mindset. The proper coverage ensures that while the loss of the individual will be felt, it will not be the outright ruin of the company. Financial losses can be covered by all or a portion of the policy as well as finding the next person to step up and take charge of the business.