You’ve built your business empire through blood sweat and tears and now your hard work has paid off. You have a thriving business and you are exactly where you want to be in life. But then one day, the rug is pulled from beneath your feet and things start to spiral out of control. This is because you have lost one of your key employees, an individual who held your company together like glue and played a huge role in keeping business flowing. With the loss of this employee, there’s no saying what could happen to your business next as so much depended on him or her. This is unless you have Keyman Insurance, that is. Before we take a look at how keyman insurance can protect the life of a business, let’s discuss how the policy works and if it is something you should consider putting in place.
What is Keyman Insurance?
Keyman insurance is what helps businesses to recover or to continue as usual even in the unfortunate event where one of the key employees passes away. In some cases, this insurance will also pay out if the covered employees develop instant medical conditions or injuries that prevent them from going back to work.
Every business has at least one valuable employee, a person whose skills or contributions to the company are very difficult to replace and without their presence, the day-to-day dealings might collapse altogether. This will leave your once thriving business in a state of turmoil. If you, as the employer, take out a Keyman policy where you are the proposer as well as the premium payer, then the terms are essentially that you have taken out life cover on your best employee/s. This means that if the key employee/s has to pass away suddenly, you can claim from your insurer for the life covered.
The purpose of this type of insurance is to cover the life of an employee for a monetary value so that in the case of their untimely death, the loss to the business is recouped with financial assistance up to the amount that was insured. As the name suggests, the ‘key person’ is a key to the firm’s success and without him or her, business could possibly fall flat.
What Makes You Qualify for Keyman Insurance?
To qualify for this coverage, you need to meet the following criteria:
- The key employee should hold no more than 49% of the company’s shares
- The collective number of the company’s shares held by the key employee and his family members should not exceed 70%.
- Proof that the role of the keyman is crucial to the company
Now that you have a good idea of what Keyman Insurance is and how it works, let’s look at how it can protect your business:
- Loss of Revenue
If a talented employee passes away, especially if this person is your number one salesman, the instant loss of revenue can be quite a shock to the system of your business. To cover for this loss so that it doesn’t affect the flow of business while you look for another key employee, having Key Insurance to pay out a lump sum is what will inevitably save the day.
- Recruiting New Employees
Not only could your business be at a loss by losing an employee, finding and training a replacement could also incur additional costs. You might need to pay a recruitment agency to find the best candidates, time will have to be set aside for interviews, and then, of course, you will have to use both more money and more time to get the new employee to the standard of his or her predecessor. This could be tricky if you now have limited funding and resources. To ensure that you have access to a money pool in a scenario where you have to recruit new workers, Key Insurance is one reliable option.
- Funding Plan B
If losing your key employee is the be all and end all of your current business strategy, then you might want to have a plan B in place. Not only can Key Insurance fund your “plan B” in terms of providing you with some new seed money or covering the costs of alternative expansions, it’s a “plan B” in itself.
Another way to look at Key Insurance is as an “exit strategy”. That is, if your business is now impossible to run without the key person, you might have to close doors completely. At least with insurance in place, you can exit smoothly but settling all of your debts and paying other staff with notice.
- Outstanding Debts
Another great thing about Keyman Insurance is that when it pays out, the money can be used to pay off any debts that the key employee might have incurred on behalf of the company. This way, you can maintain your business’s credit score without having the burden of carrying this extra debt.
- Transfer of Ownership
Keyman Insurance policies are versatile in that the money that is paid out can be used for a number of things. It can even fund the acquisition of shares from the deceased’s beneficiaries as well as cover the costs of transferring ownership. During this process, legal fees might also occur, which we all know never come cheap, but with your insurance pay-out at hand, there’s just one less thing to worry about.
The Importance of Having Keyman Insurance When in A Business Partnership
There are some employees that are crucial to the ongoing success of a business and there are just no two ways around it. This is especially the case when a business runs as a partnership where each member plays a key role in keeping the business rolling in. Each partner depends on the other partner’s contribution, whether it be financially or in talent.
If there is a scenario where one of the partners suddenly passes away, is injured, or falls ill to the extent that they can no longer work or take care of their responsibilities, this could potentially have a huge impact on the profitability of the business in question. Further to this, you could be subject to other problems. For instance, the deceased partner’s ownership stake could be transferred to their beneficiary instead of to a member who is actively involved within the company. This could leave the status of the firm in even more disarray.
And this is where Keyman insurance steps in. This type of cover is a crucial component of any business, but especially a partnership. It swoops in and helps to solve several difficult financial situations that can arise following the loss of an important individual.
Taking out an insurance policy means that you have to decide who your company simply couldn’t do without and then as the insured, you need to make sure that their life is covered if accidents, illnesses or death occurs. In the case of a partnership, two executives might personally take out Keyman policies out on each other. In the unfortunate and unforeseen event that one of the partners passes away, the proceeds of the policy can then be paid directly to the company or the remaining partner/s directly.
How Much Keyman Insurance Do You Need and How Much Does It Cost?
Now that we have discussed why Keyman insurance is so important and why it should be included into your business plan, let’s take a look at how much you would need for efficient coverage and what the monthly premiums would be like.
How much do you need?
This will depend on your business and the loss that would arise when losing your valuable employee. Some company owners purchase coverage based on 8 to 10 times the employee’s annual salary. Alternatively, you could calculate an average sum that would incur with the loss of the employee. To settle on a figure, you will have to consult with your broker to discuss your best options.
To give you an example, however, it might help you to know that coverage generally ranges £190’000 and £700’000. This figure is in accordance with the National Federation of Independent Businesses.
How much does it cost?
Insurance has no definitive figure in that premiums are calculated on the value of coverage as well as many outlying factors. The key employee’s age, physical condition and health and even the position held at the company can determine the overall monthly premium. As a general figure to consider, however, expect to pay less than £800 per year for your premium.
Does Keyman Insurance Apply to You?
To answer this question, you would need to take a step back and look at the structure of your company. If you can acknowledge that your business flow simply won’t run smoothly or perhaps might even come to a halt if one or more of your employees were missing, then adding the cost of Keyman premiums to your budget is definitely a wise decision and the coverage will certainly apply to you, yes.