Coping with the loss of a key employee - Key Person Insurance explained

May 18, 2018

As an employer, you know that running a great business means having a team of great people, but there may be one person who stands out as being a key player in the company's success. This person's knowledge, work, or overall contribution is considered uniquely valuable to the company. How would your business cope if that person were to pass away, or become seriously ill?  To summarise, in the event of Death or specified illness to this person, the business will suffer financially.

For example, research has shown that 72% of SME Businesses ceased trading within 5 years after the death of the founder of the business

The loss of a key employee / director or consultant can affect your business in many ways:

  • Loss of business contacts, management experience or intimate industry knowledge
  • Loss of good relationships built up with suppliers, banks or distributors
  • Bank loans may be called in if the ‘key person’ had given personal guarantees on these loans
  • Withdrawal or reduction of credit facilities by your bank as they become concerned about the future viability of your business
  • The additional cost of recruiting a suitably qualified and experienced replacement

What is Key Person Insurance?

This is a business-specific life insurance that can compensate a company for the financial loss and other consequences of the death of an important member of the business.

Key Person Insurance is designed to protect the business from the financial impact of a key employee / director’s absence and should be considered as a prudent strategy to protect the business.

 What solution does Key Person Insurance provide?

 A ‘Key Person’ Life or specified illness policy can be arranged with any Life Assurer in the market. Such a policy is designed to pay your business a lump sum on death or specified illness of the ‘key person’. The business pays the cost of the premiums. In the unfortunate event of a lump sum pay out being made to the business arising from death or specified illness of the key employee, this lump sum can then be used to address some of the issues raised above.

A number of factors may be considered in determining the value of the life or specified illness key person cover to be put in place. Such considerations may be:

  • Value of loans personally guaranteed by the key person
  • Value of loans the key person has made to the business that may need to be repaid to his / her estate
  • Estimated loss of profits the business would suffer due to the absence of the key person

Why take out Key Person Insurance?

Availing of this kind of life insurance can give additional security to your business, as it safeguards against the loss of a key employee. As an employer, it can bring you peace of mind in the knowledge that you are protected from the financial fall-out due from the death or incapacity of a very important member of your staff.

For more information on Key Person insurance, contact Jim Doyle on 053 9170507 or email jim@rda.ie

 

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