The death or long-term illness of a key person in any small or medium-sized enterprise is likely to have a serious impact, even if it’s only short term. Any amount of time without a key player can have a considerable impact on the profitability of the business.
Most SMEs have at least one person whose loss would cause significant disruption to the business and may even contribute to the business’s collapse. Here’s how losing a key employee could affect your business and why you may want to consider key person insurance.
How losing a key employee could affect your business
SMEs usually have one or two people behind them who drive the business forward. In most cases the founders are the business. It’s their ambition, drive, talent and vision that keep the company alive. Loss of the key person driving the business is, in most cases, devastating to the financial stability of the company. Key problems arising from such a loss include:
- Staff could leave, fearing their jobs are at risk
- Valued clients could be lost to rivals
- Suppliers might require payment in advance
- The bank could call in the overdraft
- Revenue and profits would fall
What is key person cover?
Key person cover, sometimes known as Keyman insurance, is simply life insurance on the key person(s) in the business. It protects a business against a loss of profits that come about as a direct result of the death of key people. The beneficiary of the policy is the company.
Key employees are usually the founders, but also sometimes other employees who are crucial to the business, such as top sales people, technical experts, research and development specialists, or anyone within the business who plays a key role and has a significant stake in the company’s success.
With key person insurance, a business can insure just the life of a key individual or bundle the cover together with critical illness cover. It’s worth seeking independent professional advice about key person cover. Financial services companies, such as Reeves Financial, can offer independent advice about the best policy options for your business.
What does it cover?
Key person insurance usually covers named individuals considered essential to the future of the business. If one of these key players suddenly dies, the insurance policy pays a lump sum to meet the sudden costs arising from the loss. The costs to the business when a key player dies could include lost revenue, and the cost of finding and replacing staff. Even if a replacement is found quickly, it may be some time before they are effective to the same level.
Why key person cover is important for small businesses
Every office, shop or factory has insurance to cover accidents at work, and most prudent businesses have insurance cover on the buildings, and even the desks on which they work. But, one of the most valuable assets of the business, and which could catastrophically end the business if they were taken out of the equation, are often left uninsured.
The pay out from key person cover is to help the company survive the blow of losing the person who makes the business work. When a business loses one of its key players, it can quickly find itself falling apart. Not meeting client deadlines, and not meeting financial obligations can be catastrophic.
Not only are there the financial implications of losing a key player in the business, the uncertainty it brings could have a profound effect on staff morale and customer confidence. Being prepared can help considerably in managing the transition.
How do you determine the key players?
Look at your business and assess who is irreplaceable in the short term. In the long term everyone is replaceable. In most small businesses the key player will be the owner, the person who holds the business together and makes all of the decisions.
Questions you should ask yourself about your business
If you are undecided about whether key person cover is necessary for your business, ask yourself the following questions:
- Who would do everything the key players do if they suddenly weren’t there?
- Would there be a need to recruit a replacement and how long would that take?
- Would any expansion plans, or existing projects, be detrimentally affected?
- Would your staff, customers or bank worry? If so, what would the consequences be?
How much cover should you get?
Assess how much money your company would need to survive until it could replace the key person. You need a policy that fits with your budget and a potential pay out that will give you the right financial boost should you be faced with such a tragedy. You may also want to consider critical illness cover.
How much cover is needed will be different for every business. It will depend on who they are looking to protect, for how long, their priorities and, of course, affordability. While it may be difficult to quantify, considerations for establishing the level of cover should include:
- the effect of the key person’s absence on production, sales and profits, how long you anticipate profits will be affected
- the length of time it will take to find a replacement, and how much it will cost to recruit and train them
- The effect the sudden loss will have on existing customers, and any expected additional costs
There is no single way to calculate the financial value of a key person. However, the cover required under a key person plan should be founded on the amount needed to restore the business and keep it on track.