Any business could suffer if a director or key employee died or became critically ill. As well as the day-to-day problems of covering the absence, losing a key person can have a serious effect on the company’s finances.
Who needs it and why?
Many companies should have this cover to protect against a loss of earnings or profits, and against the costs of replacing a key employee.
A company of any size can benefit from taking out key employee cover, yet it appears only a small percentage of all UK firms who should have it have taken any action to protect themselves – it is still an untapped market.
Sole traders are as vulnerable as larger companies as illness or death might cause their business to close. If they have employees, this could give rise to redundancy payments, for which the sole trader’s family would be responsible. You can find more information about redundancy at dti.gov.uk.
Before setting up key person cover, a company should record its intentions in the minutes of a board meeting. A partnership should do the same in a partner’s resolution.
Who does it cover?
The company takes out a protection plan on the lives of the key employees. The company is the policyholder. The key employees are the lives assured but the business receives the proceeds of any claim.
The plan is set up on the most suitable basis for the business’s particular needs, on either a fixed or reviewable basis. In some cases, say for an owner of the business, a whole life policy might be used.
For those who want the benefit of guaranteed insurability and cover that has premiums fixed for ten years at a time, Protect offers a rolling term as a useful alternative to term assurance with a fixed end date.
Who is a key employee?
The criteria for identifying a key employee vary widely between companies. The main point to consider is whether the business’s turnover and profitability would be affected if that person were absent because of serious illness or death.
Although most of the key employees insured are directors, key employees could include a top salesperson, a skilled technician or the leader of an essential project.