As the title suggests, key man insurance, or key person insurance as it’s also known, is a type of policy companies can take out to insure against the loss through death or illness of a key employee.
The success of a company is almost always down to the employees who make it happen and in small companies, in particular, the contribution of one key individual, such as the web designer, financial expert, head of product development, or analyst, can be critical. So much so, in fact, that their loss to the business would have a serious effect on the efficiency or profitability of the company going forward. That’s where key man insurance comes in.
How does it work?
Policies are designed to pay the company a lump sum if the key person named in the policy dies or develops a critical illness which leaves them incapacitated. Typically, the payout is used to cover loss in earnings or profits but can also be used to finance a replacement or settle outstanding company debts. While similar in many ways to a standard life insurance policy, under the terms of a key man policy, any payout is made to the company rather than the individual. The company is the sole beneficiary of this type of policy and both limited companies and limited liability partnerships can take out this type of policy. Premiums are also usually tax deductible although there are exceptions.
Different types of key person insurance
Companies can choose to buy a policy that only pays out if the named key person dies during the lifetime of the policy. Most companies, however, opt to add critical illness cover as well which adds to the cost of the policy but provides greater cover. Putting it bluntly, if the key person is diagnosed with a serious illness or has a stroke and can no longer work the effect of this on the business can be just as detrimental in financial terms as the person dying. Some providers do offer a critical illness only key man insurance policy but of the three options, this is the most expensive.
How much cover do you need?
How do you quantify the contribution key individual makes to the company’s fortunes? Ask yourself how much he or she would cost to replace on a temporary or permanent basis. Consider the loss of profits or the cost of servicing the company debts if the business lost the input of the key person. Arriving at a fixed amount can be difficult but it’s safer to overestimate what the key person is worth to the business than underestimate their value.
How long do you insure the key person for?
As long as is necessary is the simple answer. If you think the individual will be at the company for at least ten years then the policy should be for this length of time. Again, err on the side of caution and go for a longer-term policy. This will work out to be cheaper and means you won’t have to renew the policy and incur extra expense. Remember, the person you insure today will be that much older in five or six years’ time and statistically more likely to develop a medical condition. Being a higher risk will bump up the premium. If the key individual leaves the company sooner than expected, most providers will allow you to cancel the policy without penalty.
Is a medical necessary?
Much will depend on the age of the individual being insured, their medical history, and the amount of cover in place. A request for a GP report or a medical can sometimes be triggered if the key person is being insured for a large sum, for instance, above £500,000. As with any type of policy, it’s important to answer all questions honestly and provide up to date information about an individual’s health. Failure to do so could invalidate any claim made in future.
Shop around for the best price
Your present provider is a good place to start when looking for a key person insurance quote but there’s nothing to stop you from shopping around. Sourcing a quote online from a comparison site or broker only takes a few minutes and they will search across the market on your behalf. Remember, to always read the fine print and fully understand what is and isn’t covered by the policy before agreeing to go ahead.
Visit Qdos for an online quote. IR35 cover also available.
Specialist fixed-fee service from Intouch - just £105 / month.