Insuring your key(wo)men - is it really necessary?
Coping with the unexpected
Most small and medium-sized employers have at least one or two members of staff that are central to the business, without whom they would struggle to survive on a long-term basis. So imagine the potential impact if, one day, they just didn’t turn up - not because they couldn’t be bothered, but due to a major accident, serious illness or, in the worst case scenario, their death. What would happen then?
What is keyman insurance?
Keyman insurance is designed to enable the business to cope financially in the individual’s absence. As with all insurance products there are many different types available but, as standard, they typically indemnify an employer against a key employee’s sudden: (1) extended incapacity; (2) critical illness; or (3) death (see The next step).
How does it work?
The way keyman insurance operates is quite simple: the business selects an appropriate policy for a key employee, pays the relevant premium and is appointed the beneficiary. In the event of the individual’s unexpected death, illness or injury which results in them being unable to carry out their role (either on a temporary or permanent basis), the insurer will pay out. The sum insured for keyman insurance purposes is always agreed in advance, e.g. £150,000, and can be used to:
- cover the cost of temporary staff (which is often expensive, particularly at senior level)
- pay for the recruitment of a replacement
- inject cash into the business, e.g. to buy time and/or to reassure investors
- repay a company debt and/or overdraft
- purchase shares if the deceased had a significant shareholding in the business. This stops them falling into the wrong hands.
Tip. Monies paid out don’t go to the employee who is covered or their next-of-kin - there are other types of policy for that. Instead, keyman insurance is purely designed to keep your business afloat.
What’s not covered?
No keyman policy will cover every eventuality; a number of exclusions will be applied, most usually: pre-existing medical conditions, suicide or self-harm, the consequences of drug or alcohol abuse, or tropical diseases unless properly inoculated. An upper age limit may also be set, e.g. 65 years.
Tip. As with all insurance products, the cost of this cover is largely dependent on the proposer’s, i.e. your individual circumstances; the nature of its business; how financially secure it is and the potential impact the loss of the key employee could have on it. However, the employee’s health will also be taken into account. As a rough guide, for someone aged 40-45, in good health, who is working in a low-risk industry, £100,000 worth of cover should cost around £850 to £1,000.
For further information on purchasing keyman insurance, visit http://personnel.indicator.co.uk(PS 13.18.06).
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