A Guide to Key Man Insurance

Protect your business from disaster

author image-cai
By Cai Bradley
Updated on Tuesday 23 November 2021

Illustration of one business man standing out among the rest

You never know what could happen in your day-to-day life; unpredictable events occur and everything can be turned upside down in an instant.

Unfortunately, you have to be prepared for these unfortunate events, especially in the workplace, and businesses need to have a realistic contingency plan in place.

When unavoidable things happen, companies need to be prepared so that operations can continue as normal.

This is where a key man insurance policy (also known as key person or key employee insurance) comes into play, as it can reduce the overall impact of these negative circumstances on the business.

It’s been reported that 46% of businesses in the UK would be forced to stop trading immediately if a key employee died, yet so many established companies are still missing out by not purchasing key person insurance.

Below is a short guide to this type of cover, but for more information, you should speak to a reputable key man insurance specialist, such as MyKeyManInsurance.com.

What is a key man insurance policy?

Key man insurance cover is a type of business insurance that protects companies and organisations against the loss of a key employee through death or serious illness.

How does it work?

You could consider key person insurance policies to be a form of ‘business life insurance’.

The company takes out key person insurance for one or more employees, pays the premiums, and then becomes the beneficiary of the policy.

If the staff member in question is then unable to work due to a serious illness or unexpected death, a payout is provided to the beneficiary – the business – with the purpose of keeping the company afloat during the difficult time of losing a valuable member of its team.

The payout can be used for various reasons, such as covering expenses during the time the company searches for a replacement employee, as well as clearing debts and paying investors.

Bear in mind that personal life insurance is a totally different matter, but key man insurance is a potentially great safety-net for businesses that wouldn’t survive without certain team members.

Although it may not be one of the most common types of insurance, many who take out key man insurance in the UK reap the rewards of its many benefits. Some of these advantages are listed below…

The main advantages of key man insurance

If your business or organisation needs to replace an important member of your workforce during a difficult time, key person insurance can help to ease the burden.

Key man insurance is also vital for the security of a business, as you risk losing major clients and damaging your reputation if one of your main employees is no longer able to work.

As well as this, it’s worth considering that many organisations don’t typically have a significant amount of savings to fall back on, so this type of policy is able to provide business owners with complete peace of mind in the stability of the company.

Managers, directors and other senior personnel can play a crucial role in the day to day running of a business establishment, and losing them could lead to serious repercussions for all involved in the business as a whole.

With key man insurance, your business is financially protected should the worst happen to any of your most valuable and influential team members.

Protecting the company

When a business loses a key member of staff, whether it be a long-term business partner, a senior manager or an excellent salesperson, its profits are inevitably going to suffer as a result.

At a difficult time for the company, key man insurance can help reduce losses and keep profits as they were expected to be, avoiding the risk of a total disaster. Think of it as a safety-net of some sort.

You will have worked hard to gain a competitive edge over other companies within your industry, and these competitors will pounce at any sign of weakness, so having key man insurance policy in place could come in handy to help you keep your successes intact.

Similarly, you don’t want the value of your company to reduce when you lose an important employee.

It is likely that your share price will plummet if you lose a key member of your team, so you need to keep your shareholders content by maintaining the value of your company, which key man insurance is able to do.

Key man insurance can improve employees’ spirits

When a valued member of a company is no longer around, it can have a huge knock-on effect on the team’s morale.

Think about it – you could lose a senior manager or director that many of the other employees look up to as a mentor. If you don’t have key man insurance in place and this loss of an employee is coupled with business insecurity and job instability for other members of staff, you’re likely to lose them. 

When you take out key man insurance, it can also show your employees how much they mean to you and the business.

It shows the key employees that they are valued and even demonstrates to other members of staff (those not directly involved in the policy) that the company will be secure, regardless of what happens.

During pressing times, your current employees will always feel safe and secure in their role, which is especially important during rather uncertain economic times.

It’s also worth noting that insuring your valuable employee members will also help to improve your retention rates too, meaning that you’ll have more long-term and loyal staff members.

Small business key person insurance

It’s not only large businesses that can benefit from key man insurance, as smaller companies can also make full use of the policy.

In the case of small businesses, key person insurance is usually taken out for the owner or founder of the company, and perhaps a key employee or two.

It’s important that any business that could essentially sink as a result of the absence of one or two staff members has key person insurance in place for those individuals.

You should note that if your business is a sole proprietorship or sole trader, is run by just one person, and employs no one else, key person insurance is unlikely to benefit you.

How long does a key man policy last?

Key man insurance will pay out a tax-free lump sum to the beneficiaries as long as the claim occurs within the term agreed when the policy was taken out.

Key person cover usually lasts for a term of five or ten years, during which the policyholder (business) will pay a guaranteed premium. If the key employee passes away unexpectedly or is diagnosed suddenly with an illness and can no longer work, then the beneficiary will receive a payout.

Could your business benefit from key man insurance?

If you think key man insurance could come in handy should the worst happen to any of your main employees, you should think about taking out a policy immediately. You deserve to feel completely secure with your workforce, even when something devastating happens.

When you lose a key person from your company, it can have a significant impact on your sales, profits and the rest of your staff members.

A lump sum paid out from your key person insurance policy could be the difference between the success and failure of the business you worked so hard to build and maintain.

For a key person insurance quote from an FCA-authorised trader, visit MyKeyManInsurance, as they can provide a key man insurance policy completely tailored to meet your specific needs and to give you permanent peace of mind.

business insurance business small business key man insurance

Latest News